After the death of a loved one, you may be entitled to a death benefit. Rita Cool, certified financial planner at Alexforbes takes a look.
During what is a very emotionally-charged time, the paperwork which nominees are required to complete in order to claim a death benefit, can seem onerous. There are several benefits that might have been left to you with various choices to be made.
If your loved one was a member of a retirement fund – a pension, provident or preservation fund, or a retirement annuity – you could be listed as a beneficiary or nominee on their nomination form.
The Pensions Funds Act governs these funds, and in terms of Section 37C, the trustees of the funds make the final decision on who receives the death benefit. The trustees will always consider a spouse or children as dependants but they do not automatically qualify for an allocation.
The retirement fund requires that anyone who thinks they are a beneficiary must complete a questionnaire so that the trustees can use this information to make their distribution decision.
In some cases, beneficiaries might only come forward after a long time has passed, so because of this, legislation allows trustees up to 12 months to make their decision.
Not all decisions will take that long – it will depend on the situation. If you were financially dependent on the deceased for a monthly income and if the distribution is taking time, you can approach the trustees for an advance until the distribution is finalised.
How the death benefit will be paid
If you have been allocated a portion of a death benefit from a retirement fund, you have a choice between taking the money in cash after tax has been deducted, or using the money to set up a monthly income through a pension.
If the money is taken in cash, it is taxed in the name of the deceased and is thus subject to the tax rate of the deceased and not of the beneficiaries. All the beneficiaries share the effective tax rate equally and will receive the cash after tax has been deducted.
If the money is used to set up a monthly income through a pension, the lump sum is not taxed, but you will pay tax on the income as per your own tax rate going forward.
Benefits allocated to children will be taxed and the after-tax amount placed in either a beneficiary fund or a trust, depending on the trustees’ decision. This would provide an amount of money to look after the children’s needs and pay out the rest when they reach 18 or the date chosen for the trust to be dissolved.
If you are the beneficiary on a life policy, the policy proceeds will be paid out to you directly – you don’t need to go through the estate’s executor. You can approach the insurance company to complete the forms to claim the death benefit. There is no waiting period on this.
Even though there is no executor’s fee payable on this amount, the executor may request estate duty from you, as insurance benefits are deemed to be assets in the estate and attract estate duty.
Get good advice
When you stand to inherit anything you should approach a financial adviser to see how best to structure the inheritance so that it benefits you the most in the long term.
Professional advice will ensure that nobody takes advantage of you during a trying time and that you make good decisions to protect your inheritance into the future.
This post was based on a press release issued on behalf of Alexforbes.