Estate planning: Crafting a legacy for your minor children

Minor child

Creating an estate plan is essential if you intend to leave assets to minor children. In this article, we take a closer look at how you can safeguard the intended inheritance for minor children taking into account the type of assets, beneficiary nominations, trust options and associated legislation.

Bequeathing fixed 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. This means that if you bequeath fixed property to a minor child, they will become the owner of the property while their legal guardian will bear the responsibility of administering the property until the child reaches age 18 – although there are some inherent risks that need to be considered before making such a bequest in your will. Firstly, if your deceased estate runs into liquidity problems, the executor may need to realise the property to cover costs in the estate which could scupper your succession plans for the property. Further, while your minor child will inherit the property, it is their guardian who has authority over the asset, although these powers are restricted – for instance, the guardian may not realise the assets without approval from the Master of the High Court. An effective way of circumnavigating these risks is to set up a testamentary trust in terms of your will that effectively comes to fruition in the event of your passing. By bequeathing the property to the trust, the property will transfer to the trust upon your death and will be administered by your nominated trustees until your child is old enough to manage their own affairs.

Important note: Testamentary trusts are excellent estate planning tools when it comes to ensuring an additional layer of oversight with respect to managing the assets intended for your minor children. However, keep in mind that if your will is (for whatever reason) found to be invalid, no testamentary trust will be formed. It is therefore important to ensure that your will is drafted by an experienced fiduciary expert.

The proceeds of life policies

Life policies are used frequently as estate planning tools to ensure that one’s beneficiaries have access to funds in the immediate aftermath of one’s passing. However, in terms of our law, keep in mind that children under the age of 18 are deemed to have limited contractual capacity and may not directly inherit cash, such as the proceeds of a life insurance policy. This means that, if you nominate a minor child as beneficiary on a life policy, they will not be able to take control of those funds until age 18 and the funds will be managed on her behalf by her legal guardian until they reach the age of majority. As outlined above, a testamentary trust is an excellent mechanism to house assets intended for minor beneficiaries, including the proceeds of life policies. To give effect to this, you would need to nominate your testamentary trust as the beneficiary on your life policy in respect of the portion of payout intended for your minor beneficiary. In the event of your passing, the insurer will pay the proceeds (or nominated portion) to the testamentary trust, although keep in mind that it may take a number of weeks for the testamentary trust to be formalised.

Important note: 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 they do not receive the full proceeds. Depending on the liquidity in your estate, the proceeds of the policy may be used to settle debt and pay creditors, bearing in mind that all debts in the estate must be settled before heirs can receive their inheritance.

Beneficiary nomination on approved retirement funds

When it comes to nominating beneficiaries on your retirement 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 those who are financially dependent on you at the time of your death are not left without financial support. This means that, although you may have nominated your minor child as a beneficiary on your retirement fund, there is no guarantee that they will receive the funds. This is because the distribution of retirement fund benefits is dealt with by the fund trustees whose job it is to investigate and identify all your financial dependants and to apportion the fund according to their findings. If you have maintenance obligations to a child from a previous relationship or an aged parent financially dependent on you, the trustees may apportion some of your retirement fund benefits to these dependents even though they were not named on your policy.

Important note: Generally speaking, the retirement fund trustees try to expedite the process, but bear in mind that the Pension Funds Act permits them 12 months in which to make a determination, so it is advisable not to rely on these funds as a source of income for your child in the immediate aftermath of your death.

Nominating a minor child as a beneficiary on a living annuity

Living annuities make excellent estate planning tools as they allow you to nominate beneficiaries to the investment with the assurety that they will receive their benefit. However, keep in mind that as minors cannot receive lump-sum payouts, your minor child’s legal guardian will be responsible for deciding how your child receives their benefit. The legal guardian will have the option to withdraw the full amount as a lump sum or to purchase an annuity for your child and, either way, the legal guardian will have discretion when it comes to managing these funds until your child reaches the age of majority. As in the case of your life policies, you may want to consider naming your testamentary trust as the beneficiary to your living annuity which will result in these funds being managed by your nominated trustees until your child is old enough to manage their financial affairs.

Important note: Where you have nominated beneficiaries to your living annuity, keep in mind that the funds do not form part of your deceased estate and will not attract estate duty.

Discretionary investments and beneficiary nomination

Funds held in a discretionary investment should generally be dealt with in terms of your will. In the case of tax-free investments, beneficiary nomination depends largely on the type of investment vehicle used. If your tax-free investment is life-wrapped, you may nominate a beneficiary which means that the proceeds, while forming part of your deceased estate, will be paid directly to your beneficiaries and will bypass the winding-up process. On the other hand, if your tax-free investment is housed on a LISP platform, you will not be able to nominate a beneficiary and will need to deal with these funds in your will. Either way, if any of your nominated beneficiaries are minor children at the time of your death, they will be incapable of inheriting the funds directly and a testamentary trust remains an effective option for protecting these funds until your beneficiaries are old enough to manage their own affairs.

Important note: If you’re invested directly in a foreign-domiciled fund, it is advisable to seek estate planning advice as you may need to have a foreign will drafted.

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