Life policies
Life policies are used frequently as estate planning tools to ensure that one’s beneficiaries have access to funds soon after one’s death. However, in terms of South African law, a child under the age of 18 may not inherit lump sum pay-outs nor any other assets directly, because they are deemed not to have the legal capacity or ability to manage such assets. Therefore, if you nominate your minor child as a beneficiary on your life policy, she will not be able to take control of those funds until she reaches age 18, and the funds will be managed by her legal guardian until she reaches the age of majority. If this is not in line with your intentions, you may want to consider setting up a testamentary trust in terms of your Will with your minor child as the beneficiary to the trust. To ensure that she receives the proceeds of the life policy, you would then need to nominate the testamentary trust as the beneficiary on your policy. In the event of your death, the proceeds of the life policy would be paid into the trust, although keep in mind that it will take a number of weeks for the testamentary trust to be formalised. Remember, if you nominate your estate as the beneficiary on your life policy and your minor child is named as an heir of your estate, there is always a possibility that she does not receive the full proceeds. Depending on the available liquidity in your estate on death, the proceeds of the policy may be used to settle debt and pay creditors, keeping in mind that all debts in the estate must be settled before heirs can receive their inheritance.
Retirement funds
When it comes to nominating beneficiaries on your retirement funds – being pension, provident and retirement annuities funds – the process is not quite as clear cut. This is because the allocation of retirement fund benefits is regulated by Section 37C of the Pension Funds Act, with its purpose being to ensure that the financial dependants of the member are not left without financial support. So, while you may have nominated your minor child as the beneficiary on your retirement fund, there is no guarantee that she will receive the money. It remains the obligation of the retirement fund trustees to identify all your financial dependants and to decide how your funds should be shared amongst them. As such, if you have maintenance obligations to a child from a previous relationship or an aged parent who is financially dependent on you, the trustees may apportion some of your retirement fund benefits to these dependents even if they were not named as beneficiaries on your policy. Also, keep in mind that while the fund trustees will generally try to expedite the process, the Pension Fund Act allows them 12 months in which to do so. If your minor child receives a distribution from your retirement fund, note that her legal guardian will be responsible for choosing whether to take the money out in cash, transfer to it to a living annuity or a combination of both.
Living annuities
Living annuities are typically not governed by Section 37C of the Pension Funds Act which means you are able to nominate your minor child as a beneficiary on the investment. However, as your minor child cannot receive lump sum pay-outs, keep in mind that her legal guardian will be responsible for deciding whether to withdraw the full amount as a lump sum or whether to purchase an annuity income for your child. Either way, your child’s legal guardian, will have discretion when it comes to managing these funds until your child is old enough to manage them herself. As in the case of your life policies, you may want to consider naming your testamentary trust as the beneficiary to your living annuity. Remember, the proceeds of living annuities do not form part of your estate and will not attract estate duty.
Tax-free Savings Accounts
You are able to nominate beneficiaries on your Tax-Free Savings Account and, in the event of your death, your investment will be paid directly to your beneficiaries. Once again, however, if you nominate your minor child, her legal guardian will retain control over these funds until she reaches the age of majority. You are able to appoint the testamentary trust as the beneficiary to your TFSA.
Local and offshore unit trust investments
You are not able to appoint beneficiaries to your unit trust investments as, in the event of your death, the proceeds will fall within your estate and will be distributed in accordance with your wishes. Keep in mind that the proceeds of these investments will be subject to estate duty and executor’s fees.
Immoveable property
When it comes to leaving immoveable property to a minor child, our law makes provision for minor children to own inherited property and to take transfer thereof with the assistance of their legal guardian. So, if you bequeath fixed property to your minor child, she will become the owner of the property while her legal guardian will bear the responsibility of administering the property until she reaches age 18. There are, however, inherent risks involved which need to be carefully considered. For instance, if you do not have sufficient liquidity in your estate, the executor may need to realise the property to cover the costs in your estate. Remember, also, that even though your child inherits the property, it is her guardian that has authority over the asset, although his powers are somewhat restricted. For example, your child’s guardian will not be able to realise the property without approval from the Master of the High Court. To avoid these risks, consider bequeathing any fixed property intended for your minor children to your testamentary trust. In doing so, the property will be managed in your children’s best interests by the trustees you have hand selected, bearing in mind that you can nominate your child’s guardian as a trustee to the testamentary trust if you so wish. Testamentary trusts are excellent estate planning vehicles when it comes to ensuring an additional layer of oversight in respect of managing the assets intended for your minor children.
Personal belongings
If you have personal belongings and effects that you would specifically like your minor child to receive after your death, consider drafting a letter of wishes in which you can list the specific items you have in mind. To avoid confusion, be as clear as possible when describing each item, including where it is located and how it can be identified.
Have a wonderful day.
Sue
