Parenthood

The Parent Trap

October 24, 2010

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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 ®
Liberty Life
Simon.Marais@liblink.co.za

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