As financial planners, we are often confronted with the question of whether a life assurance policy should have a nominated beneficiary or not, writes financial planner Pieter Willem Moolman.
An inter vivos trust and spouse are two examples of such a beneficiary.
Any proper financial plan should be mindful of aspects such as estate duty and other taxes payable, liquidity of the deceased estate, asset protection against creditors and provision for dependants.
Therefore, when looking through beneficiary nomination glasses, one has to think of the impact that each of the above aspects may have.
According to the Estate Duty Act, a person who is entitled to the amount due under the policy can claim back premiums paid, plus 6% interest per year, as a deduction from the estate duty payable on the proceeds – if the policy is deemed an asset in the deceased’s estate.
Nine out of 10 times, an ordinary life policy will be a deemed asset. According to the act, the person claiming the deduction does not have to be the owner of the policy – simply “the person who is entitled to the amount due under the policy”.
As a beneficiary, you are entitled to the proceeds of a policy and are allowed to claim the above deduction from the estate duty, thus reducing the tax payable on the estate.
There are no tax implications for beneficiaries. People often mistakenly think the policy proceeds are subject to capital gains tax (CGT).
For an asset to attract CGT, there must be a disposal or a deemed disposal. Because the beneficiary is receiving the proceeds, and not disposing of the asset, CGT does not apply.
When a policy has a nominated beneficiary, the insurance company is obliged to pay the proceeds directly to the nominee. This money never enters the estate.
If all policies have beneficiaries, the executor will be forced to liquidate some of the estate assets to pay the costs of winding up the estate. This is far from ideal, as it is often the primary residence of the dependants, or because the asset may attract a low market price in a forced sale.
For this reason, you and your financial planner should ensure that there is enough cash in your estate to cover all costs.
Creditors cannot claim the proceeds of an insurance policy from a nominated beneficiary if an estate is insolvent. A life policy with a valid beneficiary contractually binds the insurer to pay the proceeds to the nominee on the death of the insured person.
Because the proceeds accrue directly to the beneficiary and not the policy owner, the policy can never form part of your estate for insolvency purposes. This was once again upheld in a recent court of appeal case.
So if you want to protect your assets against potential creditors, beneficiary nomination can be a handy tool.
It can take months, sometimes years, to wind up a deceased estate. Under normal circumstances, beneficiary nominations are paid out within a week or two of the death.
This allows them to be financially independent until the executor winds up the estate and distributes the assets according to the will.
Beneficiary nomination as an estate planning tool can therefore be used to the advantage of yourself and your dependants.