A scientific study first published in the late 1960’s ranked various stressful events in terms of the extent to which a person would need to adjust their established lifestyle in order to adapt to the situation, for example a bereavement or divorce. Having a child was placed in the top ten of the most stressful life-altering events which can happen to a person.
If such a study was limited to an examination only of the impact that having a child has on one’s financial planning, it is unlikely that there is any event that would have a greater impact than the addition of a child to the family. For a parent, financial planning takes on a whole new and more complex dimension, as one is forced to consider the otherwise un- thinkable: the financial impact a parent’s death will have on young children left behind.
It is imperative that a parent has sufficient life cover to sup- plement his or her existing assets in order to ensure that the estate left behind is sufficiently large to provide a suitable income for young dependants. However, there are also some simple, but crucial, estate planning arrangements that a parent needs to put in place to
ensure that such assets are easily accessible to a surviving parent and young dependants. These crucial arrangements are all easily made in the most critical document that a parent of young children will ever sign: a Will.
It has been estimated that more than 76% of South Africans do not have a Will. It can probably be assumed that many, if not most, of these people have young children. Perhaps it is a common assumption that if one dies without a Will, that a surviving spouse will simply inherit the family home and other assets, and continue to use these assets to provide shelter and income for young children. However, the true legal position is quite different.
In our law, if you die without a Will (called dying “intestate”) then the law determines your heirs according to a specific predetermined formula. In short, if you die without a Will and leave behind a spouse and children, then your estate will generally be split equally amongst the spouse and children (although there is a pro-
viso that a spouse is guaranteed a minimum of R125,000).
This split in itself is fraught with problems as it is likely to deprive a surviving spouse of the right to use the assets as she wishes. But the real horror caused by a simple lack of testamentary planning has not even begun. This is because, in the absence of a Will providing alternative structures, minor children cannot take their inheritances directly. Instead it is likely that inheritances due to minor children from an intestate estate will have to be paid over to the Guardian’s Fund, a statutory fund administered by the Master of the High Court, a government appointed functionary.
If you die without a Will, leaving minor children, then the following is likely to happen to the share of your assets which will accrue in terms of intestate succession law to your children:
- Immovable property (e.g. family home) – a minor’s portion may be registered in his or her name. However, after that has happened the minor’s property may not be sold or mortgaged without the permission of the High Court. This is highly prejudicial as it means the surviving spouse (as co-heir) cannot sell the property in later years without the delay and cost of an application to the Court. And even if the consent of the Court is obtained, the child’s portion of the proceeds of a future sale will usually have to be paid into the Guardian’s Fund.
- Movable assets (e.g. furniture, vehicles) – the minor’s share of these may be handed to his or her guardian (usually their surviving parent) but the latter will have to provide “security” to the Master’s satisfaction. This usually entails obtaining either a surety bond from an insurance company that it will stand good any loss suffered by the minor in the event that the assets are not handed over when the minor attains majority (at age 18 years), or the registration of a mortgage bond over property owned by the parent. Security bonds are practically impossible for an individual to obtain and if the child’s guardian does not have the ability to register a mortgage bond over fixed property, this may result in the movable property in the estate having to be sold so as to convert these assets to cash.
- Cash assets (e.g. proceeds of bank accounts, sale of shares and unit trusts) – the cash portion of an estate accruing to a minor can be paid to the child’s surviving guardian, but again, as in the case of the movable assets, only if “security” can be given. In practice, this usually proves not viable, and the cash ends up being paid over to the Guardian’s Fund.
- Death benefits payable on life policies – these are usually payable directly to the beneficiary nominated on the policy. If a minor child is so nominated, the life assurer will usually require that the minor’s surviving guardian opens a banking account in the child’s name into which they will make payment. The surviving guardian will then administer the account on the child’s behalf. In this scenario the policy proceeds are not paid into the Guardian’s Fund, but if no beneficiary is nominated on the policy then the proceeds are usually payable to the deceased policyholder’s estate – resulting in the same problem mentioned in point 3 above.
Simply executing a Will should easily overcome all these potential problems. If a surviving spouse is made the sole heir, then no assets will accrue to minor children. This will be an obvious solution unless an even more unthinkable event occurs: the simultaneous death of both parents.
A Will should provide for the possibility of the simultaneous death of both parents i.e. by appointing children as substitute heirs in this event. Whenever minor children stand to inherit (whether as direct or substitute heirs), provision should be made in the Will for “trustees” to be named by the testator. These named trustees, who can include close relatives, trusted friends and/or professional advisors, will take and administer the minor’s assets. Such a structure will eliminate the requirement that the minor’s assets be paid to the Guardian’s Fund.
So forget the material things, the best gift to leave your children is a well-planned estate, including a properly constructed Will.
For more information, contact:
Simon Marais BComm
CERTIFIED FINANCIAL PLANNER ®