Death and red tape

2012-10-20 13:47

Our reader’s experience highlights the challenges often faced when trying to resolve a late estate, especially in terms of retirement benefits.

It is also a good lesson in estate planning. While you may intend to leave your retirement benefits to a particular beneficiary, your wishes may not necessarily be carried out

When Gayle approached Old Mutual to process the paperwork on her late father’s retirement annuity, in which she was named a beneficiary, she was faced with reams of it.

“They wanted everything from what I earn and what I spend on milk and bread, to who depends on me for what.

“They even wanted to know the details of my father’s marriage to my mother – they got divorced in 1977 in another county!” says an exasperated Gayle.

She was also required to have her stepmother renounce her rights to the benefits, even though Gayle was named as the beneficiary on the policy.

“Only after she’d signed did I realise it had to be done in front of a commissioner of oaths,” says Gayle, who admits that by this stage she gave up and shelved the paperwork in exhaustion.

In contrast to Gayle’s experience, her stepmother was a beneficiary of a life policy and her paperwork was sorted out within 24 hours after she had faxed through some basic documents.

The bureaucracy around a late estate can result in delays and frustration that gives a whole new meaning to the term “red tape”.

Understanding what is required and why it is required is one way to shorten the process and also provide food for thought for your own estate planning.

The difference between a life policy and a retirement death benefit
Piet Spreeuwenberg, the client services manager at Old Mutual, explains that a life policy is paid out very quickly as it is a simple matter of paying out to the beneficiary named on the policy.

The retirement annuity that Gayle was entitled to has an entirely different set of rules.

Spreeuwenberg explains that although a member of a retirement fund can, and indeed should, nominate potential beneficiaries in the event of their death, under the Pension Funds Act the trustees of the fund have to ensure that the money is given to those people who were dependent on the member at the time of death.

This would, for example, protect dependant children who may still rely on him for maintenance payments if the father remarried and left all his pension funds to his new wife or his former wife.

A life policy, on the other hand, is not bound by the same rules and will pay out only to the beneficiary stipulated on the contract, which simplifies the process.

Who are the potential beneficiaries?
A trustee of a pension fund has to consider all people who were legally and factually dependent on the member.

A legal dependant includes the member’s children, somebody who the member was married to (which includes customary law marriages) or a previous spouse who may have been financially dependent on the member by means of a maintenance order.

» A factual dependant is someone who may not necessarily even be a relative of the deceased member, but who was financially supported by the deceased, such as someone who was, for instance, sponsored by the deceased in terms of school fees or daily living expenditure.

“In Gayle’s case, because the trustees knew that the member was previously married, there is a good chance that the divorce order would have granted maintenance to the member’s former spouse.

“This is something that the trustees have to investigate, unless the potential beneficiary renounced her rights to any benefits,” says Spreeuwenberg.

He goes on to explains that this is the reason why a copy of the divorce order was requested.

Challenging the named beneficiaries
This is where claiming retirement benefits from a late estate can become very complicated.

Anyone who has a legal claim to those funds has to cooperate and sign away their rights.

In this case, Gayle’s stepmother is by definition a legal dependant and her interest has to be taken into account as well.

She had to renounce her rights to any benefits, which she undertook to do, but you may be faced with a situation where even
if the spouse has been taken care of through other policies they may not agree to sign away their rights to the retirement fund.

Spreeuwenberg says that unless a potential beneficiary specifically renounces his/her rights to the benefits, the trustees legally have to assume that the person has not renounced their rights.

Even if a decision has been made on allocation, they would call it a preliminary decision, which gives the other beneficiaries the opportunity to challenge it.

Spreeuwenberg says: “Only when the trustees are satisfied that the interests of all legal and factual dependants have been taken care of, and there is still a portion of the benefit left for distribution, will the trustees consider beneficiary nominations.”

This can create further delays and the named beneficiary may not receive the funds they believed they were entitled to.

As Gayle was no longer dependent on her father, had her stepmother not agreed to waive her rights, she may not have received the retirement benefit, even though she was the named beneficiary.

How much is a beneficiary or dependant entitled to?
Spreeuwenberg says that although there may be many dependants it does not mean that the benefits will be distributed in equal shares.

In order to decide how much each beneficiary should receive, the trustees need to have a very good understanding of each beneficiary’s financial position.

This is also why they may call for a statement of the beneficiary’s monthly income and expenditure.

“The job of deciding who will benefit from the fund and the extent by which each beneficiary will benefit is therefore sometimes quite onerous,” says Spreeuwenberg.

He adds that it is not always possible for the trustees to request all the required information at the beginning of the process, as additional information often only becomes available as the trustees work with a particular case.

This means that further information is requested to guide the decision-making process.

The bottom line is that it can take months, if not years, to resolve a death claim against a retirement fund, especially if there are several dependants.

This is important to keep in mind when doing your own estate planning. Make sure you have some life cover in place, which
will pay out immediately to cover the day-to-day expenses of your dependants.

You should also update the beneficiaries of your retirement benefits to include all dependants in order to assist the trustees and expedite the process.

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