Leaving assets to a minor child requires more planning than simply naming the child in your will or on a beneficiary nomination because, while our law allows a minor to inherit and own assets, the child cannot take control of that inheritance in the same way as an adult. Without an appropriate plan, where the inheritance is held, who administers it and how it may be accessed could instead be determined by legislation, the Master of the High Court, a product provider or a retirement fund’s board of trustees. It is therefore important to understand how each asset will transfer on death and who will manage it until the child can assume control.
Distinguish guardianship from trusteeship
A guardian and a trustee fulfil distinct functions, and the appointments should therefore be considered separately. A guardian exercises the parental responsibilities and rights recognised by the Children’s Act, which may include administering property owned directly by the child, whereas a trustee administers assets held in trust in accordance with the will. While the same person may fulfil both roles, the person best suited to care for the child may not have the time, experience or skill required to manage a substantial inheritance.
Where a parent is the child’s sole guardian, the Children’s Act allows that parent to appoint a successor guardian in their will – although note that this appointment does not establish a trust or determine who will administer assets bequeathed to it. Where the inheritance is intended for a testamentary trust, the will should separately appoint trustees and set out how the assets may be used and when the child will become entitled to the capital.
Direct bequests and the Guardian’s Fund
Where money is left directly to a minor child, the executor will generally be required to pay it into the Guardian’s Fund unless the will directs it into a testamentary trust or makes another valid provision. Although the fund provides statutory protection, accessing money for the child’s maintenance, education, medical expenses or accommodation requires a formal application and supporting documents, while other expenditure may need to be motivated. The guardian also has no control over how the capital is invested, meaning that the strategy cannot be aligned with the child’s time horizon and future needs.
Bequeathing immovable property
A minor may inherit immovable property and have it registered in their name, although the guardian is required to administer it, and any sale or mortgage will remain subject to the necessary legal authority. As such, keep in mind that direct ownership of immovable property may leave the guardian responsible for an illiquid asset that does not meet the child’s immediate needs. While a testamentary trust can provide more workable oversight, it cannot cure a liquidity shortfall in the deceased estate, meaning that the executor may still need to sell the property to settle debts, taxes and estate administration costs.
Using a testamentary trust
A testamentary trust is created in terms of a valid will and comes into existence following the testator’s death, although the trustees may not act until authorised in writing by the Master of the High Court. The will can empower the trustees to fund the child’s maintenance, education and medical costs while preserving the balance for the longer term and, because the trust need not terminate when the child turns 18, distributions can occur later or in stages. However, the provisions should remain sufficiently flexible, while the costs, tax consequences and ongoing administration should be weighed against the size of the inheritance.
Life policy proceeds
Where a beneficiary has been nominated on an individual life policy, the proceeds can generally be paid without first being administered through the deceased estate. A minor child may be validly nominated and become entitled to their share of the proceeds but cannot receive or control the money personally. Depending on the policy terms and the insurer’s claims requirements, the proceeds will generally be paid into an account in the minor’s name under the control of the child’s legal guardian, or otherwise placed under the guardian’s administration on the child’s behalf. This means that a substantial policy benefit may place considerable financial responsibility in the guardian’s hands, with any remaining capital generally falling under the child’s control when they turn 18.
Where the policyholder would prefer the benefit to be managed by chosen trustees, an existing inter vivos trust or, where the insurer permits, a testamentary trust created in terms of the will may be nominated as the beneficiary. If the policy is instead made payable to the deceased estate, the proceeds will first fall into the estate, where they may be exposed to estate liabilities, administration costs and delays before any remaining amount can be transferred to the testamentary trust. Nominating the trust directly is therefore not the same as nominating the estate and relying on the will to direct the proceeds to the trust later.
Retirement fund death benefits
Unlike assets that devolve in terms of a will, death benefits held in pension, provident, preservation and retirement annuity funds governed by the Pension Funds Act are distributed in accordance with section 37C. In terms of this provision, the fund’s board must identify the member’s dependants and nominees and determine an equitable allocation, meaning that a beneficiary nomination is important but not binding. Where part of the benefit is allocated to a minor, the board must determine how it should be administered under the legislation and fund rules, which may involve payment to the guardian, a beneficiary fund or, where the requirements are met, a trust. The will cannot compel the board to pay the benefit to a testamentary trust, although an up-to-date nomination consistent with the estate plan can assist its investigation. As this process may take many months, note that these benefits should not be the child’s only source of immediate liquidity.
Living annuity nominations
A living annuity is not subject to section 37C, meaning that the provider does not investigate the annuitant’s dependants where there is a valid nomination. If a minor child is nominated as a beneficiary of a living annuity, the child is entitled to their share, although their guardian must make the available election on their behalf in accordance with the provider’s requirements. This may include taking cash, transferring the benefit to a living annuity in the child’s name or combining the two.
If cash is selected, the provider must apply for a tax directive, with the lump sum taxed in the hands of the deceased annuitant under the retirement fund lump-sum benefit table and their cumulative history of taxable lump sums, withdrawal benefits and severance benefits. The after-tax amount is then paid in accordance with the provider’s requirements for administration on the child’s behalf. If an annuity is selected, the guardian must make the investment and income decisions until the child reaches majority, meaning that, once again, a direct nomination can place considerable financial responsibility in the guardian’s hands.
Where this is not intended, it may be preferable to nominate an inter vivos or testamentary trust, provided that the provider permits and accepts the nomination. The trustees would make the election and administer the benefit in accordance with the applicable trust instrument, potentially retaining control beyond the child’s eighteenth birthday. The provider’s rules and tax consequences should be considered beforehand, bearing in mind that a validly nominated living annuity benefit generally passes outside the deceased estate and is not subject to executor’s fees. The living annuity itself is generally not subject to estate duty, although disallowed retirement fund contributions may affect the estate duty calculation in certain circumstances.
When planning for a minor child’s inheritance, the objective is to ensure that sufficient capital is available, that the person caring for the child can access money when needed and that the balance remains protected and invested for the longer term. This requires the will, any applicable trust provisions and beneficiary nominations to operate together, supported by accessible liquidity while the estate and retirement fund claims are finalised.
Have a wonderful day.
Sue
