Leaving funds to minors: what you need to know
South African legislation states that any child below the age of 18 is not allowed to inherit lump sum pay-outs or other assets directly. The reasoning behind this is straight forward; minor children do not have the legal capacity or ability to deal with such assets in a constructive and meaningful way.
However, for many parents, the sole beneficiary of their estates are their minor children, which might pose a dilemma. Without proper understanding of the laws and regulations regarding minors and assets, proper estate planning and professional advice, your risk benefits might be distributed incorrectly or never reach your children at all.
As uncomfortable as it may be, parents need to decide on two very important things when doing estate planning: who will look after their children’s daily needs if they pass away; and who will look after the money or assets their children would inherit.
These two aspects might seem very simple, but each of these are layered with an array of legislation, technicalities. To help you better understand the process better, let’s unpack some of these layers.
Understanding the difference between approved and unapproved death benefits from policies
The way in which lump sum pay-outs are facilitated differs slightly between approved and unapproved death benefits and it is vital to understand how these differences impacts pay-outs to minors. With both types of death benefits, the importance of a nomination form cannot be stressed enough as it largely dictates where your benefits are paid out to.
- Approved death benefits
If the cover you have taken out is linked to a retirement fund, it will be referred to as “approved” cover. In this case, the policy holder will be the retirement fund.
Here, you will still be required to complete a nomination form when joining the Fund, or as and when your beneficiary details change; however, the trustees of the fund will ultimately decide on the distribution of your death benefits, by exercising their fiduciary duties under Section 37C of the Pension Funds Act. This does not mean that your nomination form is ignored, it will still be considered and remains vital. Trustees need to establish your legal and factual dependants.
- Unapproved death benefits
If the cover is provided under an employee owned policy, it will be known as “unapproved” cover. The policyholder will be the employer or company on behalf of the members or employees. With an unapproved risk fund, your nomination form is seen as your last and final wishes. Here, there are no trustees and the full death benefit will be paid out as instructed on the nomination form.
If there is no nomination form in place, proceeds may be paid to a guardian (if stipulated in the will), in rare cases the employer, but most likely it will go into the state guardian trust fund. When the minor reaches adulthood, they can apply to receive these funds from this guardian trust fund.
Understanding beneficiary funds
Beneficiary funds were first introduced in South Africa about 10 years ago to directly address the issues around minor beneficiaries of death benefits. Beneficiary funds are also governed by the Pensions Fund Act and helps to ensure that your death benefit pay-out is managed and administered well, especially in the event where the beneficiary(ies) are minors.
Beneficiary funds are also very cost effective, tax effective (no tax is paid in the fund and any payment out of the fund is tax free). It is an excellent way to ensure that your children and other dependant are well taken care of, even after you have passed away.
Deciding on a guardian
Deciding who to trust with your children’s lives if you pass away, is a near impossible task. The first deciding factor that may come to mind is whether your children know this person and if they will be comfortable living with them. However, there are other very important practicalities to consider as well, because this person may be responsible for your children’s inheritance after you pass away. Always ask yourself the following g questions:
- Do you trust this person implicitly?
- Are they responsible with money?
- Do they have history of impulsive spending or a bad credit record?
- Will they be able to ensure that your children’s inheritance is invested and managed properly until they are old enough to receive it?
The legislation surrounding minors and the inheritance of assets and lump sums is a very complicated and specialised area of expertise. Therefore, having an expert financial advisor that is experienced in estate planning by your side is a no brainer. If you are worried that your estate and will might not be structured correctly, contact us today and make sure that your children are taken care of and protected in the event of your death.
Reasonable steps have been taken to ensure the validity and accuracy of the information in this document. However, Cornerstone Financial Services (Pty) Ltd or any of its subsidiary companies does not accept any responsibility for any claim, damages, loss or expense arising out or in connection with the information in this document. This article is meant to be informative and educational but should and can in no way replace the services and advice of a qualified and experiences financial advisor. If you would like to learn more about Cornerstone Financial Planning and Cornerstone Employee Benefits, please click here to contact us.