You want your children to inherit the generational wealth you created, and you name them as beneficiaries in your will and on your life insurance policy. But they’re younger than 18 years when you pass away, and your assets are sold and the money (including the life insurance pay-out) deposited into the Guardian’s Fund, a government-created fund that manages money for minors until your children turn 18, earning a very low return!
This can and does happen when minor children inherit, because in South African law, they cannot actually inherit until they turn 18. There is a way to deal with this and make sure your children benefit from the wealth you created – set up a testamentary trust in your last will and testament.
What is a testamentary trust?
A testamentary trust is a trust that comes into effect on the death of the founder to own and manage assets on behalf of beneficiaries, usually minor children who cannot legally inherit the assets until they turn 18. A testamentary trust can be set up in a will.
If you set up a trust in your will, your assets such as any savings and your family home will be transferred to the trust on your death. The trust and the assets in the trust are managed by trustees, who will distribute income and assets to minor children so they can benefit from their inheritance, for example using the income from the trust to pay for education, food and clothing. When they reach age 18, your children can legally inherit the assets the trust has been holding. Because it involves family, a testamentary trust is also known as a family trust.
Good to know: There is a difference between a trustee and a guardian. A guardian is appointed in your will to care for your children on a day-to-day basis, including providing a place to live and making sure they go to school. A trustee is appointed to manage the trust’s assets and make sure the beneficiaries benefit, such as using income the trust earns to pay school fees. A guardian can be a trustee, however it is often a good check and balance to have a separate, independent person as a trustee, who is financially astute, according to trust specialists, Trusteeze.
How do I set up a trust fund for minor children?
You set up a trust in your will, where you give details and instructions on:
- Why you are setting up the trust, for example, to make sure your beneficiaries’ inheritance is used to pay for all their expenses until they reach a certain age.
- Who the beneficiaries are, such as your children.
- Who the trustees are: you can name trustworthy family friends and or experts such as a lawyer.
- The trustees’ duties, for example, they need to make sure school fees are paid and a family home is maintained, in addition to their legal obligations and requirements such as opening bank accounts and keeping financial statements for the trust.
- When the trust will end: you may want your children to inherit at age 21, rather than age 18.
Trusts are governed by the Trust Property Control Act, and there are a lot of legal requirements that need to be followed when setting up and managing a trust. It is also very important to note that if your will is invalid for any reason, the trust set up in the will will also be invalid.
For these reasons, it is highly recommended that you speak to an expert such as your financial adviser, lawyer or a fiduciary specialist to help you make your will and set up the trust.
What happens if I don’t have a testamentary trust?
If you do not have a trust and your children are minors, your assets will be sold when you pass on and the cash invested in the Guardian’s Fund, which is a fund administered by the Master of the High Court. Until they reach 18 years, your children cannot access the funds apart from limited amounts (currently R250 000 of the capital and any interest earned) to pay for certain expenses such as school fees.
You want your children to be cared for, especially if the worst happens and you are no longer around to provide for them. You can make sure this happens with some preparation and a testamentary trust. Your children will miss you enormously, but they will know how much you loved them and wanted to give them the best you could. Don’t delay – make sure your will is valid and up to date and you have made adequate provision for your minor children so they can benefit from the generational wealth you created.