Child Friendly Estate Plan: Trust versus Guardians Fund

by Annemarie Schutte

Do you find yourself worrying about your children, specifically regarding their financial wellbeing once you are no longer here to love and support them?

If you are, your concerns have already brought you one step closer to the solution. I consult with people on a weekly basis who find themselves in this position and are often increasing their life cover in an attempt to make provision for their children.

Great, now you have life cover which will pay out on death and then everything is sorted, right? Wrong! In terms of South African law, a minor child cannot inherit. So even if the funds are there, they will not necessarily have access to the funds.

Now you are probably thinking you have a valid will and you have named your beneficiary on your life policy, that is all well, but what is the practical difficulties if your children are left without a natural guardian? 

Let's look at a couple of important points in this regard.

You have a valid will:

Your executor will report your estate with the Master of the High Court and will await the Letter of Executorship before the administration may commence. The Executor must ensure that all assets are brought in, debt is paid, and then pay out/ transfer bequests to heirs as directed in the will.

You don't have a valid will:

If you pass away without a valid will, your estate will be administered in terms of the Intestate Succession Act, 81 of 1987. Whereby your heirs will be determined by law.  The Master will appoint an Executor who will administer your estate. 

In both instances estate duty of 20% is payable on the value of your estate, with an exemption of R3 500 000 and executors' fees at 3.5% on the value of your estate plus 6% on income received in the estate.

During the period of administration, the estate is frozen. If you are married in community of property it poses a whole new issue, since there is only one joint estate, the surviving spouse may have difficulty accessing funds.

If you have minor children, their inheritance will be paid to the Guardians Fund, a fund administered by the Master of the High Court. This fund can only hold cash, thus all assets will have to be liquidated. The Master will open an account in the name of your child. If the minor requires maintenance, an application must be brought to the Master, motivating the reason for the funds required. The minor will only have access to the funds, once he/she reaches the age of majority.

I don't know about you, but I want to ensure my child's needs are met without delay. In order to sidestep this major pitfall, you need a certain vehicle to hold the funds for your minor child.

This vehicle is a Trust. It can either be an inter vivos Discretionary Trust (a living Trust) or a Testamentary Trust, provided for in your Last Will and Testament. We do however recommend an inter vivos Discretionary Trust since the Trustees are granted flexibility in terms of decision-making to enable them to change their direction to adapt to external changes, i.e. property markets, changes in legislation, etc.

To ensure your estate plan is minor child friendly, you should ensure you have a Trust structure, with your loved ones, including your descendants listed as Beneficiaries. Once this is set up, change your life insurance policy so that your Family Trust is the owner of the policy, the payer of the policy and the Beneficiary of the policy. The funds will be paid into the Trust's bank account and the Trustees will be able to cover the minors' maintenance without delays. You should contact your broker to request the necessary documents and your Trust Advisor to assist with a resolution in this regard.

The access to Trust funds will not be influenced by the passing of a Founder or Trustee, since Trust assets do not form part of the deceased's personal estate.

Aim to build a portfolio of assets and capital in the Trust rather than in your personal capacity, the less you have in your deceased estate, the shorter the administration time, the lesser amount of estate duty and Executor's fees payable.

Don't hesitate to contact us regarding your Last Will and Testament and your Trust structure. It is imperative that your Last Will and Testament make provision for your loan accounts, any other assets still in your estate and that all references to your Trusts are consistent with your Trust Deeds. 

Once you have your Trust structure in place, your Last Will and Testament set up and your policies updated, you are well on your way to a child friendly succession plan!

I want to leave you with a thought.  'We may not be able to prepare the future for our children, but we can at least prepare our children for the future' - Franklin D Roosevelt. What if there is a way? I sure want to find it!

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