One of the key outcomes of sound estate and tax planning is the extent to which dependants are protected.

Estate and tax planning is all about structuring your wealth optimally for both during and after your lifetime. A key aspect of this is providing financial protection to your beneficiaries and children and any other vulnerable members of your family, planning for the education of your dependants, and facilitating intergenerational wealth transfer.

There are a range of tools available that enable generational wealth planning. 
These tools can help ensure that your wealth is safely transferred to your intended dependants and that those dependants are equipped to receive and protect their inheritance.

Having a valid, updated will

It is one thing to provide for your loved ones while you can control and keep an eye on matters – but what will happen when you are no longer here? It is critical to make sufficient provision for your loved ones and dependants for after your death, for your and their peace of mind. The most important document we all need to have in this regard is a will that reflects our current wishes, as this will become our voice when we no longer have one. The table below summarises the key aspects of a will that you need to be aware of.

Why a will is important

• A will has a significant impact on the quality of life of your family and dependants after you die.
  
  
• A lifetime of building and preserving your wealth can be undone by not having a will. If you do not have a valid will, your assets will be distributed in accordance with the Intestate Succession Act 81 of 1987, which means your wishes may be ignored.

What to consider when drafting your will 

Get the help of an expert who can help you draft an appropriate, viable and valid will that considers all the relevant aspects, such as:

• Your unique personal, financial and family circumstances.
  
  
• Any obligations you may have (for example, divorce order and dependants).
  
  
• The liquidity of your estate.
  
  
• Tax efficiency (capital gains and estate duty implications).

When to update your will 

You should review and update your will from time to time, but especially when there’s a change in your personal or financial circumstances, for example:

• A new marriage, separation or divorce.
  
  
• The birth of children or grandchildren.
  
  
• A substantial addition or sale of assets.
  
  
• The death or insolvency of a beneficiary.
   

Changes in legislation may also affect your will.

Using a trust for wealth transference

A trust can help ensure the safe transfer of wealth to your dependants and that they derive the most value from the assets you have worked hard to acquire. It can:

• Protect your family wealth in the event of liquidation, sequestration or divorce.
  
  
• Provide for dependants or other relatives who may not be able to look after themselves or take care of their financial affairs (for example, minor children).
  
  
• Provide financial security for your loved ones since the board of trustees will act for your beneficiaries after you have passed away (or in the event of incapacity or absence).
   

Using a trust as a vehicle for estate planning can be a complex exercise, which is why it is important to get professional, personal advice. As with your will, your trust and its provisions should be revisited every time there are significant changes in your life.

There are several trust options available – two of the most common are:

• A testamentary trust, which is established on your death.
  
  
• An inter vivos trust, which can be created while you are alive.
   

Your specific needs and circumstances, like your marital status and family set-up, your income, and your assets will determine which option is best for you.

In addition, special trusts can be effective tools in the case of minor children or beneficiaries with special needs. There are two types of special trusts:

• An inter vivos/testamentary trust created for people with special needs.
  • Purpose Provides safe custody of assets of people with special needs, for example, individuals with serious mental or physical disability and who are unable to provide for themselves financially.
  • Benefits Provides peace of mind for parents of special needs children who are concerned that their children will be taken advantage of financially after their death; also provides special dispensation in respect of income tax and capital gains tax.
    
    
• A testamentary trust for minor children
  • Purpose Houses assets bequeathed to minor children or beneficiaries in terms of your will.
  • Benefits Provides peace of mind to parents of minor children that the assets bequeathed to their children will be protected until the children are old enough to manage their own financial affairs, while at the same time enjoying some tax benefits.

Nominating beneficiaries on your life insurance policy

Life insurance policies can be used to make financial provision for dependants and create liquidity in your estate. However, it is essential that the policy is correctly structured so that it serves its intended purpose. 

When considering a beneficiary nomination, you should pay attention to:

• The type of policy that you have.
  
  
• The purpose for which it was taken out (for instance to create liquidity in your estate, to settle a specific debt or to pay a maintenance claim).
  
  
• The effect the nomination will have on the administration of the deceased estate.
  
  
• How the policy fits into your holistic estate plan.

What to consider when nominating a minor beneficiary

It is common for parents to nominate their children (often minors) as beneficiaries on life insurance policies. However, before you nominate your minor child, it is important to carefully consider the implications:

• The proceeds won’t be paid directly to your minor child.
  The proceeds of the policy will (usually) be paid to the child’s guardian, which means the proceeds might never reach your child. (A guardian in this context refers to both natural guardians, that is, parents who have a duty to support their children, and legal guardians appointed by the court if for any reason the natural guardians cannot carry out their duties).
  
  
• Different insurers deal with minor beneficiaries in different ways.
  Some insurers pay the proceeds directly to the minor, others pay to the guardian, and some insist on paying the proceeds into a trust set up for the benefit of the minor.
  
  
• Multiple guardians or no guardian can complicate matters. 
  Where a minor has more than one guardian, each of the persons qualifying as a guardian can act independently and without the consent of the other, according to the Children’s Act. On the other hand, if you have not appointed a legal guardian, the proceeds will be paid to the Guardian’s Fund (which falls under the administration of the Master of the High Court) until the minor reaches the age of majority. The problem with this is that the process of accessing money from the fund can be quite cumbersome.

Because of these challenges, it might be worthwhile to consider alternative options on your life insurance policy:

Option 1: Combining your life insurance policy with a testamentary trust 

• In your will, state that a testamentary trust is to be set up for the benefit of your children upon your passing, specifying the age when each of your children will inherit their share of the life insurance policy proceeds.
  
  
• Nominate the testamentary trust or your estate as beneficiary of the policy proceeds and stipulate in your will that proceeds should be paid to the testamentary trust for the benefit of your minor children.
  
  
• Make sure that you have sufficient life insurance to:
  • provide for your children’s income needs;
  • settle any debts you might have; and
  • cover the cost of administering the trust.

Option 2: Combining your life insurance policy with an inter vivos trust 

• Nominate your existing inter vivos trust as a beneficiary on your life insurance policy.
  
  
• This will mean less delay in the pay-out of the policy proceeds (in most instances money will be made available immediately to your children for maintenance) and no executor’s fees will be payable (since the proceeds won’t fall into your estate).
  
  
• Make sure that you have sufficient life insurance to:
  • provide for your children’s income needs; and
  • cover the cost of administering the trust.

Nominating beneficiaries for the death benefit from your retirement fund

The death benefit from your retirement fund (that is, your pension fund, provident fund, pension and provident preservation fund, or retirement annuity fund) is expressly excluded from your estate – the benefit will be dealt with according to the Pension Fund Act, which governs these types of funds. You therefore cannot bequeath this benefit to a specific person in your will and the executor of your estate does not deal with the payment of these benefits.

While you can nominate beneficiaries for the death benefit, this nomination is not binding on the trustees. According to section 37C of the Act, the trustees have a duty to allocate and pay the benefit in a manner that they deem fair and equitable to dependants. This requires them to:

• Identify the dependants and nominees of the deceased.
  
  
• Effect an equitable distribution of the benefit amongst these dependants and nominees, taking into account all relevant factors.
  
  
• Select an appropriate method of payment for the benefit.

It is therefore not advisable to rely solely on a death benefit to provide for those who are financially dependent on you, and why it is important to ensure you have sufficient life insurance.

Options available to beneficiaries and the related tax consequences. 

A major beneficiary who receives a share of the death benefit can choose to receive their benefit either as a cash lump sum or as an annuity (or as a combination of the 2).

• If the beneficiary chooses to receive a lump sum, the lump sum will be taxed according to the retirement tax table and the tax will be payable in the deceased estate.
  
  
• If the beneficiary chooses to receive the total or a portion of the benefit allocated to them as an annuity, the beneficiary can choose the annuity provider. The amount used to buy the annuity will not be taxed, but the annuity income will be subject to income tax in the hands of the beneficiary.

Nominating beneficiaries on your living annuity

Living annuities make excellent estate planning tools and one of the benefits of a living annuity is that it can facilitate the smooth transfer of invested capital to your dependants. Unlike other retirement funds, most living annuities allow you to nominate beneficiaries (including trusts), which mostly provide the nominated beneficiaries with immediate access to the investment proceeds on your death. It is also not a requirement that the nominated beneficiaries must be financially dependent on you. Importantly, funds invested in a living annuity does not form part of your estate and therefore does not attract estate duty. In receiving the proceeds, your beneficiaries have 3 options:

• Withdraw the full amount – this will however mean the capital will be taxed according to the retirement tax tables.
  
  
• Transfer the full amount to another living annuity or make a partial withdrawal and transfer the balance to a living annuity in their own name.
  
  
• Maintain the living annuity in its current form, with the option of adjusting the underlying investments and drawdown levels. 

To make an informed decision about protecting your dependants, professional advice is critical. There is no one-size-fits-all solution when it comes to sound estate planning. Our expert advisers can help you put the appropriate legal structures and estate planning tools in place to cater for your specific needs and circumstances.

Want to know more?

• Contact your wealth manager.
• Find out more about our fiduciary offering.
• If you’re interested in what we can offer you, we’d love to hear from you. You can contact us on 0800 111 263, or complete an online contact form.