What to consider when naming your beneficiaries

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If you have one or more policies in place, ensuring that you have correctly named your beneficiaries and that your beneficiary designations remain relevant to your needs as your circumstances change over time remains an important part. of the estate planning process. However, there are several intricacies when it comes to selecting your beneficiaries that must first be considered, starting with understanding your intentions regarding the proceeds of the policy. Here’s what to consider:

Your intentions

Before naming a beneficiary for your policy, it is important to have an overview of your estate plan so that you have a clear idea of ​​what you hope to achieve through the naming process. Do you want to provide for the needs of a loved one in the event of your death? Want to make sure your loved ones have immediate access to funds in the event of an untimely death? Do you want to create cash in your assets? Do you wish to provide for minor children? Do you have a special needs child to take care of if you are no longer there? Your estate planning intentions are key to defining the process for naming beneficiaries while taking a holistic view of the policies you have in place.

The type of policy

The type of policy you have in place, as well as applicable regulations, will impact both your beneficiary designation and policy payout, so it is important to understand the nature of each policy you have in place. square. Various types of policies can include:

Life insurance: The designation of the beneficiaries of your personal life insurance policies will, again, depend on your intentions. If you designate your spouse and/or children as beneficiaries of your policy, the proceeds will be paid to them directly after your death and as such is a great way to ensure that they have access to the capital during the liquidation of your estate. . Remember that the proceeds of such a policy will still be considered deemed property in your estate and will therefore be subject to inheritance tax. However, keep in mind that a policy recoverable by a surviving spouse or child under a registered prenuptial or postnuptial agreement will qualify for a deemed property exemption.

When choosing your beneficiaries, keep in mind that you can select multiple beneficiaries and specify how the payment should be split between them. When initiating the policy, you will need to designate your beneficiaries, failing which your estate will be the designated beneficiary and, in the event of death, the proceeds will be paid to your estate where it will form part of your taxable estate. It is therefore essential to think about how you intend to use the proceeds of the policy before naming your beneficiaries.

Life annuity: As the owner of a life annuity, you are free to designate the beneficiaries of such a contract and, in doing so, you will ensure that your loved ones have quick access to the capital. Designating your life annuity as beneficiaries means that the assets will not form part of your taxable estate – provided that all contributions to the retirement fund are eligible for a tax deduction. As recipients of your life annuity, your loved ones can choose to make a full lump sum payment, transfer the lump sum to another life annuity, or set up a combination of exit annuity and life annuity. That said, keep in mind that under section 10c of the Income Tax Act, if a contribution to a retirement annuity was not eligible for a tax deduction and is now part of In a life annuity, where the beneficiary keeps the life annuity, it is not part of the estate – but if and when it is cashed in, it is part of the estate.

Pension funds: If you contribute to an approved pension fund, either personally or through your employment, it is important to know that the allocation of these benefits is governed by Section 37C of the Pension Funds Act. Under this legislation, your beneficiary designation will serve as a guide for the trustees of the fund, whose function is to distribute death benefits fairly among your financial dependants. Financial dependence is central to the determination of the trustees and in reaching their decision they are required to carry out a thorough investigation to establish exactly who is financially dependent on you, in whole or in part, and to divide the proceeds between your persons. dependent accordingly, bearing in mind that the determination process can take up to a year. As such, be careful and don’t rely on your retirement funds to provide cash to your loved ones in the event of your death.

Unapproved Benefits: If you have unapproved group life insurance benefits in place through your employer, make sure you have designated beneficiaries for your policy if that is your intention. Whereas previously, in the absence of a beneficiary designation, your employer could determine to whom the proceeds should be distributed, this is no longer the case. If there is no beneficiary designation, the proceeds will automatically be paid to your estate, which could harm your loved ones. If you are unsure whether you have designated beneficiaries for your group life insurance policy, check with your human resources department and make the necessary adjustments.

Buying and selling policies: While proceeds from domestic life insurance policies are considered a deemed asset in a deceased estate, corporate insurance policies are one of the few exceptions to this rule provided they are properly structured. In the structuring of a purchase and sale contract, the contract must be entered into by the shareholders of the company for the purpose of purchasing the shares of the deceased or disabled shareholder, the deceased must not have entered into the contract nor paid any bonuses, and the shareholders must be shareholders at the time of the death of the deceased.

Beneficiaries who are minors and have special needs

Before naming a minor child as the beneficiary of a policy, it is important to understand the legal ramifications of such a decision, as the outcome could be contrary to your intentions. Remember that a minor – meaning anyone under the age of 18 – does not have contractual capacity and as such proceeds may be paid to the minor’s guardian in the event of death. If the minor does not have a legal guardian, proceeds will be paid into the state-run Guardian’s Fund, where it will be administered on their behalf until the minor reaches the age of 18. To prevent such a situation from occurring, you can consider creating a testamentary trust to protect the assets intended for your minor beneficiaries. A testamentary trust structure can also be used to house assets for the benefit of a child with special needs unable to manage their own affairs, knowing that this type of trust has additional tax advantages. In structuring your policy, you will need to name the testamentary trust as beneficiary to ensure that upon your death the proceeds will be paid directly to the trust, of which your minor beneficiaries are named beneficiaries.

Your will

It’s important to keep in mind that naming a beneficiary on a life insurance policy does not remove assets from your deceased estate. The nomination process is designed to ensure that proceeds are paid directly to a specific person or entity in the event of death and, subject to a few exceptions, proceeds from a domestic life insurance policy will be treated as deemed property in your estate. Avoid mentioning your policies in your last will, as this can cause confusion and delays.

Review of your applications

A regular and ongoing review of your beneficiary appointments is essential to the success of your estate plan, so be sure to review your beneficiaries at least once a year or as and when there is a major change in your personal situation, such as marriage, divorce, death or birth.

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