While undoubtedly the worst-case scenario to consider, as parents, we need to make sure our children’s needs are accounted for in the tragic event of our untimely death. Felicia Hlophe offers some critical pointers for parents, who may not realise the dire consequences of failing to plan.
It is important to take a long-term, considered view of providing for your minor dependants in the event of your death. Follow the steps below to make sure your bases are covered.
1. Draft a valid will
To nominate a legal guardian for your children and control how the assets in your estate are to be distributed, you must execute a valid will, keep it updated, and store it in a safe place where it can be found after your death. It is never too early or too late to execute a will.
There are templates available online to assist you with putting a will together, but you may wish to get assistance from a professional – like your banker, lawyer or financial adviser – to ensure it is valid. Update your will every time there is a life-changing event, such as a marriage, the birth of a child or a death in the family.
While you would have been asked to nominate beneficiaries for some of your investments (see point 3), your will should discuss how you want your other assets to be distributed.
Dying without a valid will in place has terrible repercussions for your children (see point 2). In addition, your assets will be distributed according to the Intestate Succession Act. This may result in your assets being inherited by people other than those you would like to leave those assets to. The winding up of your estate could also take longer and cost more.
2. Appoint a legal guardian for your minor children
As stressed above, a key component of your will is to nominate a legal guardian to take care of your minor children in the event that both parents pass away. This is a legal appointment in terms of the Children’s Act. The guardian will be expected to take on full parental responsibilities and, unless a trust has been set up, administer any inherited assets until your children turn 18 (see points 3 and 4). A guardian is typically a trusted family member or friend who has agreed to take on this responsibility.
If you do not appoint a legal guardian in your will, one may be appointed by way of an application to the High Court of South Africa. However, a court application is often a lengthy process, which could leave your children without a guardian for a significant period.
What happens to your assets if your children are left without a guardian?
If you leave assets directly to minor children who do not have a legal guardian, you run the risk of these assets being transferred to the government’s Guardian’s Fund, where they will be administered until your children turn 18.
The Guardian’s Fund falls under the administration of the Master of the High Court, and maintenance for your minor children would have to be claimed from this Fund. Claiming from the Guardian’s Fund as an individual who is looking after your children is an administration-heavy process and not ideal when funds are required immediately for your children’s needs. Retirement funds are treated differently (as discussed in point 3).
3. Keep the beneficiaries of your various policies up to date, and familiarise yourself with the restrictions on a minor’s inheritance
When planning your estate, it is important to understand the death claims process for each of your investment products and make sure that you have taken the necessary steps to make the process as easy as possible for those you will leave behind.
According to South African law, a child under the age of 18 is considered a minor and may not inherit cash payouts or any other assets directly. If you nominate your minor child as a beneficiary of your investments, your child will not be able to take control of those assets until they turn 18 (the age of majority); all assets your minor child inherits from you must be managed by their legal guardian.
Following is an explanation of the inheritance rules around various investment products.
Living annuities, tax-free investments and endowments
With Allan Gray, your living annuity, endowment or tax-free investment account is structured as a life policy and requires you to appoint beneficiaries. While you can nominate anyone, including a minor child, as a beneficiary, when you pass away, the child’s legal guardian will act on their behalf and receive the benefit.
For living annuity benefits, the legal guardian will need to decide whether to receive the full amount as a cash lump sum, purchase an annuity product or take the benefit as a combination of a cash lump sum and an annuity.
Make sure you update your beneficiaries with your financial services provider to ensure that your intended beneficiaries actually receive the benefit.
According to South African law, a child under the age of 18 is considered a minor and may not inherit cash payouts or any other assets directly.
Retirement annuity funds, pension funds and provident funds (including preservation funds) are governed by specific fund rules and legal requirements, which affect how death benefits are paid out. These investments are treated differently from your other investments, and are expressly excluded from your estate.
Although you can nominate beneficiaries, including minor children, every retirement fund is managed by a board of trustees, and these trustees are responsible for allocating and distributing the benefits according to section 37C of the Pension Funds Act. The trustees are responsible for identifying and tracing dependants, investigating their financial circumstances and determining how the benefits should be paid out.
There are three ways minor children’s benefits can be paid:
- To the legal guardian
- To a trust that has been nominated either by the member, or a person recognised in law or appointed by a court as the person responsible for managing the minors’ affairs or meeting their daily care needs
- To a beneficiary fund designed to accept and administer lump sum death benefits
In cases where a minor does not have an appointed legal guardian, the facts of each case will determine whether the benefit is to be paid to the minor’s caregiver, or into a trust or beneficiary fund.
You cannot appoint a beneficiary for unit trust investments. These investments will be treated as part of your estate and should be allocated in your will, along with your other assets. Your executor will then ensure they are distributed according to your instructions.
Foreign currency investments made via the Allan Gray Offshore Investment Platform should be included in your South African will, but may also be included in a foreign will if you have one. If included in your South African will, your Allan Gray Offshore Investment Platform investment will not be subject to the administrative complications of estate laws in offshore jurisdictions or require the appointment of a foreign executor, as is the case with many offshore-domiciled investments. Your South African executor will then ensure that your investment is distributed according to the instructions in your will.
4. Consider setting up a testamentary trust
Another way to ensure that your minor children’s interests are protected is to provide for a trust in terms of your will, known as a testamentary trust. In the event of your death, the trustees of this testamentary trust will administer your children’s benefits on their behalf until they turn 18 (or a more advanced age that you can specify).
You may also indicate exactly how your children’s inheritance must be used, or empower the appointed trustees to administer the inheritance as they see fit. It is important to carefully choose the right trustees, who will act in your children’s best interests.
If you provide for a testamentary trust, you may name that testamentary trust as a beneficiary of your living annuity, tax-free investment or endowment policy. You can also stipulate that, on your death, the trust must manage your other assets, including any unit trust investment. In the event of your death, the funds from your investments would then be paid into the trust – which may include your retirement fund death benefits, if this is the decision of the trustees of the retirement fund.
Make sure that your loved ones, or those appointed to take care of them, know what will need to be done in the event of your death …
A testamentary trust has ongoing expenses as well as tax and legislative consequences and is not suitable for everybody. It is worthwhile seeking professional advice regarding the types of trusts that are available and their legislative and tax implications.
Keep your affairs in order
Many investors overlook the importance of good estate planning when thinking about their broader financial plan. Neglecting to think about what will happen to our assets when we are gone can have disastrous consequences for our loved ones – particularly minor children if we don’t appoint a legal guardian.
Half the task is creating a plan, but it is just as important to share your plan: Make sure that your loved ones, or those appointed to take care of them, know what will need to be done in the event of your death to make the process as seamless as possible.