Adv. Sankie Morata CFP®, CEO of Sanlam Trust

When a retirement fund member dies leaving a minor child behind, trustees face an important decision: How to manage the child’s share of the death benefit.

A beneficiary fund can offer valuable protection, particularly where a child’s money needs to be managed over several years. But it should not simply be the automatic choice because the beneficiary is a minor. The circumstances of the child and family matter, and trustees need to apply their minds to what will genuinely serve that child best.

This has been brought into sharper focus by recent discussion in the industry following a Pension Funds Adjudicator determination involving a decision to transfer a minor’s benefit to a beneficiary fund rather than pay it to the surviving parent.

The important lesson for trustees is not that beneficiary funds are right or wrong. It is that there is no one-size-fits-all solution.

“Every family is different. Trustees have a duty of care, but they also have a responsibility to think independently. They need to understand the circumstances and must be able to explain why their decision is in that particular child’s best interests,” says Adv. Sankie Morata CFP®, CEO of Sanlam Trust.

So, when might a beneficiary fund be appropriate?

There are circumstances where structured management of a child’s benefit can provide valuable protection.

A guardian may be doing everything possible to care for a child but may not have the financial experience to manage a sizeable lump sum over many years. The household may be under significant financial pressure or exposed to creditors. Family circumstances may be unstable, or there may be legitimate concerns about whether money intended for the child will remain available for their education, healthcare and other future needs.

There may also simply be practical value in having the benefit professionally administered, invested and paid out according to the child’s changing needs over time.

Importantly, these circumstances must be established – they must not be assumed.

“If there are concerns, trustees need to ask more questions. Sometimes that means going beyond what is written on a form. What are the child’s actual circumstances? Who is caring for them? What are their education and living needs? Is there anything that could put their benefit at risk? That is where proper due diligence becomes vitally important,” says Morata.

This is also where the quality of the trustee process matters.

Trustees should be able to show what information they considered, why they reached their decision and why the chosen payment method was appropriate. A blanket policy that automatically sends every minor’s benefit to a beneficiary fund removes the very discretion trustees are expected to exercise.

The same care should apply in the other direction. Paying a benefit directly to a guardian should not become a box-ticking exercise either. A decision can be legally available and still require careful consideration of the circumstances surrounding the child.

What should trustees expect from a beneficiary fund?

There is another side to this conversation, and it is one that beneficiary fund administrators should be comfortable having.

If trustees decide that a beneficiary fund is appropriate, they should expect the administrator to demonstrate the value it will bring to that child.

That means looking beyond investment returns. How are fees structured and communicated? How are requests from guardians assessed? How accessible is the administrator when a family needs help? How is the child’s education supported? What happens when difficult circumstances arise? And, importantly, how is the beneficiary prepared for the day when the fund eventually pays out to them?

For Sanlam Trust, these are not peripheral questions. They are part of what good beneficiary fund administration should look like.

A child may be supported by a beneficiary fund for many years. During that time, circumstances can change dramatically. A good administrator needs to remain connected and engaged with the beneficiary and guardian, not simply processing payments from a distance.

This is ultimately why trustee discretion matters so much.

“Protecting the money is important, but the money belongs to a child whose life is unfolding on a daily basis. The right decision is the one that gives that child the best possible chance of benefiting from what their parent left behind,” says Morata.

Sometimes that will mean using a beneficiary fund. In other circumstances, paying the guardian may be the better option.

The most important thing is for trustees to ask questions, understand the circumstances, and make a decision they can stand behind.

ENDS