Why can’t I nominate beneficiaries on my unit trusts?

Dear reader,

To better understand why you are not able to appoint a beneficiary on your unit trust investment, it is important to understand the legal structure of a unit trust.

A collective investment scheme is a trust-based scheme that pools investors’ funds in order for the investor to get access to professionally managed investments. These funds are pooled together to form an investment portfolio which is then divided into equal parts; these parts are referred to as ‘units’. The units represent the part of the portfolio that is owned by the investor and this is seen as an asset in your estate.

Given that your wish is for a beneficiary to receive the proceeds of your unit trusts, it is important that you draft a valid last will and testament.

This will ensure that the assets owned by you are distributed in accordance with your wishes.

In effect, you are able to nominate a beneficiary through the use of your last will and testament to receive the proceeds of the unit trust.

It is very important that you complete an estate planning exercise to ensure that there is sufficient liquidity in your estate to settle estate costs and to honour the bequests laid out in your will.

If you had a specific need for a beneficiary to receive these proceeds without them being paid into your estate, you could consider using an endowment policy.

As the endowment policy is regulated under the Long-Term Insurance Act and is seen as a contract between the policyholder and the insurer, the right to nominate a beneficiary arises from the agreement between the policyholder and the insurer. Therefore the difference between this and a unit trust is that the insurer owns the underlying unit trust that you have selected, but in return has an obligation to pay the benefits per the contract.

When choosing between a unit trust or an endowment, the following factors should be carefully considered.

These two investment vehicles are taxed differently. The unit trust structure would mean that any interest income earned as well as capital gains realised made would form part of your taxable income and be taxed at your marginal rate. For the endowment structure these would be taxed in the hands of the insurer at their fixed rate of 30%.

Liquidity is another important consideration. An endowment has rules and restrictions to access the funds within the first five years, whereas a unit trust is easily accessible.

Beneficiary of the proceeds. Upon your death, the unit trust would be wound up directly in the estate of the investor, whereas with an endowment, one is able to nominate a beneficiary to receive the proceeds directly. The ability to nominate a beneficiary for proceeds through the endowment would mean that the investor would save on executor fees.

As you can see from the above, finding the appropriate solution is dependent on your personal goals and objectives, and it is always advisable to engage with your financial advisor to help you take into consideration your holistic portfolio to meet these objectives and make a well-informed decision.