How your investments are dealt with when you die – and why it matters for your estate plan

A common misconception is that your will governs the distribution of all your assets when you die.

In reality, whether an asset falls into your deceased estate and how it is distributed depends on the nature of the investment, the jurisdiction in which it is held, and any beneficiary nominations that may be in place. While certain assets bypass your estate entirely, others are fully subject to the estate administration process – and understanding these distinctions is crucial to ensuring your estate plan works as intended.

In this article, we examine six common types of investments and what happens to them upon death.

Living annuities

Living annuities are highly effective succession planning tools because you are free to nominate any beneficiaries you choose. Upon death, the proceeds are paid directly to those beneficiaries, usually within a short time once the administrator has been notified and the beneficiaries have indicated how they wish to receive their benefits.

They may take a lump sum, transfer the funds to a living annuity in their own name, or opt for a combination of both – bearing in mind that the first R550 000 of lump-sum withdrawals across all retirement funds (including the deceased’s pre-retirement withdrawals) may be tax-free, depending on the deceased’s tax history.

Transfers to another annuity in the beneficiary’s name are tax-free, although any income they draw thereafter will be taxed at their marginal rate. Where you have nominated a beneficiary to your living annuity, the proceeds of the investment will not form part of your deceased estate, are not subject to estate duty (to the extent that the contributions were tax deductible), and do not attract executor’s fees – thereby bypassing the delays of the estate administration process.

Retirement funds

Pension, provident, preservation, and retirement annuity funds are governed by the Pension Funds Act, with Section 37C prescribing how death benefits are distributed.

Remember, retirement funds enjoy generous tax benefits because they are designed to provide for your retirement years and reduce reliance on the state – and, for this reason, legislation provides fund trustees with the responsibility to identify your financial dependants and apportion benefits fairly among them, regardless of your beneficiary nomination.

In such circumstances, the definition of ‘financial dependant’ can include your spouse, children, parents, siblings, or anyone else who was financially dependent on you at the time of your death.

As these benefits are paid directly to the dependants, note that they fall outside your estate, and do not attract estate duty and are not subject to executor’s fees. Further, while generally protected from creditors, no protection is afforded in respect of debts owed to the South African Revenue Service or court-ordered maintenance.

Endowment policies

Endowment policies are often used by investors with marginal tax rates above 30% and can serve a number of estate planning purposes. The policyholder is able to choose who the life assured will be and nominate beneficiaries accordingly. Further, proceeds are paid on the death of the last life assured and are usually available immediately, thereby bypassing the estate administration process.

It’s important to note that, while the proceeds of endowments do not form part of the winding-up process, they are considered deemed property in the deceased estate and are subject to estate duty – although no executor’s fees are payable on the proceeds where beneficiary nominations were made. Endowments can also be structured to provide liquidity to cover estate costs, making them useful in estates where the majority of assets are illiquid, such as property holdings.

Tax-free investments

When opening a tax-free savings account (TFSA), you may have the option to nominate a beneficiary, depending on how the investment is structured. If your TFSA is ‘life-wrapped’ (i.e. structured as a life policy), you are able to nominate a beneficiary who will then receive the proceeds in the event of your passing.

These proceeds – while still dutiable – will bypass the estate administration process and avoid executor’s fees. Where no beneficiary is nominated on a life-wrapped TFSA, the proceeds will be paid into the estate, which can defeat the purpose of avoiding delays and costs.

On the other hand, if the TFSA is held on a linked investment service provider (LISP) platform, you are not able to nominate a beneficiary, and you will need to specify in your will how you want the funds distributed. In such circumstances, the proceeds will be subject to estate duty, executor’s fees, and any delays of estate administration. Note that, while in the estate, the investment retains its tax-free status in respect of interest, dividends, and capital gains.

 Unit trusts

Unit trusts (also known as collective investment schemes) are discretionary investments regulated by the Collective Investment Schemes Control Act and can provide important liquidity during retirement.

From an estate planning perspective, unit trust investments fall within your estate, are subject to estate duty, and will attract executor’s fees. Upon notification of death, the LISP platform freezes the account, thereby preventing further transactions, although the investment continues to earn market returns. As such, it is important to stipulate in your will how you wish these proceeds to be distributed.

 Offshore investments

How offshore investments are treated depends entirely on their structure and jurisdiction. Generally speaking, if you are invested offshore indirectly via a rand-denominated feeder fund on a South African platform, the funds form part of your South African estate and should be dealt with in your local will. On the other hand, direct investments in foreign-domiciled funds or foreign bank accounts may require more complex planning.

While your South African will typically covers worldwide assets, certain holdings – such as direct ownership of shares in a foreign company or immovable property abroad – may require a separate will compliant with the foreign jurisdiction’s laws. Keep in mind that some countries, such as civil law jurisdictions, have what are referred to as ‘forced heirship’ rules, which can override your will and dictate how assets must be distributed. It is also critical to determine whether South Africa has a double taxation agreement with the country in which you are invested, because without such an agreement, your estate could face estate duty locally and inheritance or estate tax abroad, significantly reducing the value passed on to heirs.

As is evident from the above, the way your investments are structured has a direct impact on how efficiently and cost-effectively they transfer to your heirs. Some assets bypass the estate administration process entirely, others are subject to estate duty but not executor’s fees, and others pass through the full winding-up process, attracting both costs and delays.

This makes it essential to integrate investment structuring with your broader estate plan, ensuring beneficiary nominations are current, wills are correctly drafted for all relevant jurisdictions, and liquidity is available to settle estate costs without forcing the sale of assets.

 A comprehensive estate plan is not only about reducing taxes and fees – it is about ensuring that the right assets end up in the right hands at the right time, with as little stress and delay as possible for those left behind. By understanding how each investment will be treated upon your death, you can make informed decisions today that will preserve and protect your legacy.