Contrasting the payment of a minor's inheritance to the Guardian's Fund with umbrella trust
We asked Jonathan Mort of Jonathan Mort Inc, Attorneys to contrast the payment of a minor's inheritance to the Guardian's Fund with umbrella trust arrangements.
It is common for an inheritance in the form of cash to be payable to a minor beneficiary (under the age of 18 years). If that minor beneficiary has a guardian (the father or mother of the minor, or a person appointed as guardian by the High Court) the inheritance can be paid to that guardian who must use the inheritance for the benefit of the beneficiary. When the beneficiary reaches majority, the guardian must pay to them the inheritance remaining and provide an accounting to the beneficiary, if required, as to how the inheritance has been used for his or her benefit. If the minor beneficiary has no guardian then the cash inheritance must be paid to the Guardian’s Fund. The Guardian’s Fund is administered by the Master of the High Court, and the operation of it is set out in chapter V of the Administration of Estates Act. The cash held by the Guardian’s Fund is invested by the Public Investment Corporation (PIC). In terms of the most recent annual report of the Guardian’s Fund that was able to be located for this article, as at 31 March 2017 the Guardian’s Fund held assets of R12,2 billion. The most important information about monies held by the Guardian’s Fund for minor beneficiaries is:
For as long as the beneficiary is a minor, interest accumulates and is compounded monthly. The current rate is 7.8%.
If monies are needed for the maintenance, health or education of a minor then application must be made to the Master for that. The requirements for this are quite burdensome: amongst other things, the Master requires the fingerprints of both the beneficiary and the guardian, completion of an application form, confirmation of the bank account to which the amount must be paid, an affidavit and proof of ID. The risk of losing the inheritance through fraud is thus very low.
Payments can be made directly to the school or health care provider.
When the minor reaches majority (18, or on marriage if earlier than 18), the minor must apply for the benefit to be paid to him or her. Interest is not payable after age 18, unless the beneficiary is under some other legal disability (such as curatorship).
There is no fee payable to the Master for the administration of the inheritance, for making payments whilst the beneficiary is a minor and on reaching majority, or in respect of the investment of the monies.
The Master does not undertake any tracing exercise of beneficiaries entitled to payment of their inheritance. Instead, there is a list published annually in the Government Gazette (which it would be very unlikely any beneficiary would see) of amounts unclaimed.
If the beneficiary does not claim the inheritance from the Guardian’s Fund 30 years after becoming a major (i.e. by age 48) then the amount held for him or her is forfeited to the State.
The capital and interest of the monies kept by the Guardian’s Fund are effectively guaranteed by the State and there is thus almost no investment risk.
In short, an inheritance kept in the Guardian’s Fund is safe and the income is a little higher than inflation (at current rates). There are also no costs involved. But it is quite an effort to claim from the Guardian’s Fund and because there is no effort to trace beneficiaries it is possible that a minor beneficiary may not know that there is an inheritance due to him or her when attaining majority, in which event, if claimed later, no interest would be paid after the age of 18. And if the beneficiary never claims the inheritance, it will go to the State in the end. There are alternatives to having the inheritance kept in the Guardian’s Fund for a minor beneficiary. Where an amount is received from employment-related benefits of a deceased retirement fund member, the trustees of the retirement fund can opt for it to be paid into a beneficiary fund. Another option – which is the focus of this particular article - is for it to be held in a trust either in the will of the deceased (a will trust) or in another trust set up to hold inheritances (a professional inheritance trust). In terms of a will trust, a trustee would have to be appointed by the Master in terms of the Trust Property Control Act. As a professional person or firm would either act as trustee or assist the trustee, there would be costs involved, and so it is often not worthwhile to set up a will trust in your will unless the inheritance due to the minor is greater than R500 000. In the professional inheritance trust, such as The Fairheads Legacy Trust, this would:
Be administered by professional trustees. Although this would be at a cost it would usually be lower than a trust established in the will of the deceased. This is an umbrella trust with multiple beneficiaries’ accounts.
Invest the inheritance at institutional rates, usually on a conservative basis so that although there is some investment risk that is a very low risk. But this would usually give a better return that the interest rate payable by the Guardian’s Fund.
Usually provide for an easier application process for payment of maintenance, health and educational costs than the Guardian’s Fund.
Allow the inheritance to be kept to a later age than 18 if the will said so. It is common for the will to say age 21 or age 25, which is better than age 18 because at age 18 the beneficiary is usually still at school, and the later a beneficiary receives the inheritance, the more likely it is that they will use it sensibly.
Trace the beneficiary when they are entitled to the inheritance so that they receive it then with little risk of it becoming unclaimed and ultimately reverting to the State.
Importantly, if you are a guardian and you hold the money for the minor beneficiary, you can ask a professional inheritance trust to administer that money in the same way as if the will required it to be paid to that trust. This is a good way of protecting the inheritance of the minor in case you pass away or you do not have the financial skills to manage such money. If you want to put in place an arrangement for a professional inheritance trust you should:
Check that the trustees are appointed in terms of the Trust Property Control Act;
Check that either the trustee or the trust administrator is licensed in terms of the Financial Advisory and Intermediary Services Act;
Ask what the costs are;
Ask what the investment arrangements are, and the costs of those. Be especially careful if the administrator invests in its own products.
Ask what the process is for the monies to be paid for maintenance, health or educational needs of the beneficiary, and when the trust ends;
Ask what professional indemnity cover there is for the trustee and the administrator;
Ask for a copy of the most recent audited financial statements of the trust to see that they were not qualified statements and that they were done by a reputable firm of auditors;
If necessary, consult a professional adviser to assist you.