Question: I have a special needs child who needs permanent care. I am concerned about what will happen to him when my wife and I pass away. What should we do now to ensure that he has sufficient funds to live on when we are no longer around?

Answer: I have helped several people in this kind of situation and there are two things you need to do:

1. You need to ensure that there will be sufficient funds to care for your child for the rest of his life once you and your wife die.
2. You also need to ensure that the correct legal structures are in place to manage these funds and care for your son once you have passed away.

You need to establish how much it will cost to look after your child each year and what the typical annual cost increases for this type of care would be. You can then calculate how much money will be needed to provide this level of income for the rest of your child’s life. Your financial adviser should be able to determine how much capital will be needed to provide this level of income.

The easiest way to fund this would be for you and your wife to take out life insurance. Remember that when you do this, you must make allowances for estate duty, as the insurance proceeds will be dutiable.

As this insurance will run for the rest of your lives, you must choose a premium pattern that is not age-related. This means that the premiums will be a little higher initially, but when you hit your fifties the premium increases will still be affordable.

Special trust

You need to set up a special trust to manage your child’s finances when you’re no longer around. A special trust may only benefit your child and comes with tax benefits.

Give some thought when it comes to choosing the right trustees. They must have your child’s care at heart and be able to make sensible financial decisions. You also need to put structures in place regarding how to replace them should they pass away. The trustees would make the necessary payments for your child’s care and manage any investments for them. These would include the proceeds of the life insurance policies.

When you retire

If you structure your pension cleverly, when you retire you can use your retirement fund to provide an income for your child once you and your wife pass away. The type of annuity you choose will therefore be crucial.

If you are with a defined benefit fund (where you get a pension based on your service and final salary), you need to check with the retirement fund counsellor to establish what benefits they have for adult dependants. These benefits are often small and you may need to speak to a financial specialist to see what other options are available.

If you are with a defined contribution fund (where you get a lump sum to buy an annuity when you retire), you have two choices:

1. You can choose a living annuity, and as long as your drawdown is correctly managed, there should be funds to help subsidise your child’s living expenses for the rest of their life.
2. If you need a higher income and want a guaranteed life annuity, you must be careful, as life annuities do not provide an orphan’s pension. You can, however, provide for this by choosing a life annuity that offers a payback of your capital when you die. This could then be used to provide a lifetime income for your child.

As you can see, setting up the right structure for your child is complex and I would recommend that you speak to a skilled financial adviser to help you put the correct solution in place. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to [email protected].

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.