THE FINANCIAL WELLNESS COACH
Testamentary trust can secure a child’s inheritance should both parents die simultaneously
If you do not make alternative arrangements, your child’s inheritance will go into the Guardian’s Fund until he or she turns 18.
Question: We have just had our first child and want to update our will. Are there any special issues we should look out for?
Answer: The first thing you should consider is what would happen to your child should both of you die at the same time.
If you do not make alternative arrangements, your child’s inheritance will go into the Guardian’s Fund until he or she turns 18. This fund is administered by the Public Investment Corporation and gives a return of 4.25% a year at this point. This is less than the inflation rate.
The way to avoid this is to make provision for a testamentary trust in your will. Should both parents die, a trust will be created to look after your child. There are several advantages here.
The funds can be invested in such a way that the assets should grow by more than inflation and ensure that your child is adequately looked after in the future.
Any drawdowns for the maintenance and education of the child may be more easily dealt with in the testamentary trust. In the Guardian’s Fund, there are restrictions on how much you may withdraw.
You may keep the trust going until the child is older than 18. Giving an impressionable 18-year-old a large inheritance may result in the child spending the money unwisely. A testamentary trust can be structured to run to the age of 21, 25 or even 30.
You should nominate a guardian for your child and name that person in your will. Remember to check with the proposed guardian that he or she is prepared to act in that capacity. You should also nominate alternative guardians in case the nominated guardian is not available.
The guardian will be responsible for the child’s future care and wellbeing. By nominating the guardian in your will, you will remove potential family squabbles over who will take care of your child. These squabbles are never in the best interests of the child.
You should also give thought to whether you have sufficient assets to look after your child if you and your spouse die simultaneously. Consider taking out life insurance that would pay out an annual amount until your child reaches a milestone age such as 25. This will make it easy for the guardian to manage the cash flow needed to look after your child.
It will also help to prevent the potential danger of entrusting a large sum to someone who may not be skilled at managing cash flows and budgeting. I have found these life policies that pay out an annual amount to be quite a bit cheaper than those that pay out a large lump sum upfront.
You must remember to look at your will whenever you do your annual financial review and check that the arrangements you have made for your children are still appropriate. DM
Kenny Meiring MBA CFP is an independent financial adviser.
This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.