For working parents, nothing makes braving those early mornings and late nights more worthwhile than knowing that your efforts will help give your children a good start in life. You may already have included them in your Will, hoping that your hard work and sacrifice will one day benefit them as beneficiaries to an inheritance.
But this is just the start, warns David Thomson, senior Legal Adviser at Sanlam Trust. He says there can be potentially devastating consequences if parents are not aware of the pitfalls of securing their children’s financial future through inheritance.
For instance, parents need to know that minors can’t manage their inheritance on their own without the assistance of a legal guardian. And, in the absence of a surviving parent or legal guardian, a child’s inheritance must be held in the Guardian’s Fund which is controlled by the Department of Justice.
Thomson explains that it is critical for parents to understand the difference in the role of a trust versus the purpose of beneficiary funds as well as the Guardian’s fund. “If you don’t, you may not be making an informed decision about how your child’s inheritance is described in your will.” So parents really need to understand how the different vehicles work in order to make considered decisions.
So, let’s start by looking at a testamentary trust as an option
This is a trust described in a last will and testament that commences after the founder has died.
South African law prohibits children under the age of 18 from entering into contracts without the consent of their legal guardian. “Therefore, if you want to leave an inheritance for your children – whether immovable property or the proceeds of policies or investments – and especially if you are a single parent, you should rather set up a trust for their benefit until they reach the age of maturity,” says Thomson. He adds that parents can avoid complications that may arise, by establishing a testamentary trust in their last will and testament.
The alternative would be an inter vivos trust but that requires professional management from the date of commencement and may simply lie unused if the trust is only required after death.
For instance, whoever becomes your children’s guardian can get access to their inheritance and may end up using the funds for purposes that are not aligned with your wishes, and that don’t benefit your child’s upbringing and maintenance. This is a terrible reality that any parent should go to great lengths to prevent.
Thomson adds that there is an important advantage in the creation of a testamentary trust in that it allows you to appoint one person as a guardian for your children while another person can be the trustee for your estate. Separating these responsibilities will help avoid possible abuse of the money you’ve left for your children, by their guardian. “You can nominate any competent person you trust as a trustee, or a professional trustee such as a trust company. The appointment of the trustee will ultimately be made by the Master of the High Court, who will ensure a proper process is followed,” says Thomson.
A testamentary trust also offers the advantage of enabling you to nominate your own trustees and it allows you to have more than one trustee, e.g. a family member and your financial planner or a trust company.
What does a beneficiary fund do?
If your last will and testament does not specify that your employee benefits should be transferred to a testamentary (or inter vivos) trust, your minor child’s inheritance will be transferred to a beneficiary fund. The key difference between the two is that the beneficiary fund only accepts money from Employee Benefits such as proceeds of retirement, pension and provident funds as well as approved and unapproved group life benefits. The beneficiary fund enjoys many features of a pension fund and is properly regulated by the FSCA (formerly known as the FSB).
“A certified financial planner can play an important role to help a parent plan ahead to have their children’s inheritance transferred to a testamentary trust or beneficiary fund upon their passing,” says Thomson.
What about the Guardian’s Fund?
If a parent’s will has no testamentary trust clause, nor a clause providing for bequests to an inter vivos trust and there is no surviving guardian for the children, all assets of the estate left to minor children are transferred to the Guardian's Fund. This is a state fund administered by the Master of the High Court. Proceeds from employment benefits – such as pension fund, provident fund and group life benefits – are paid into beneficiary funds.
However, the Guardian’s Fund may receive the proceeds of employee benefits only if there are no known dependants or nominated beneficiaries who are still alive, or if the deceased died intestate. Retirement benefits generally do not form part of a deceased estate. Only in very rare situations can they possibly form part of the estate as in most cases the fund will remit the proceeds directly to the nominated beneficiaries and/or dependants or a trust set up for them.
Thomson says while no one likes to think about death, parents can secure great peace of mind by understanding the various options for the provision of support to their children and knowing that they’ve put the required plan in place should they pass away.