Ensure minors are catered for with a trust

Abig problem faced by the life insurance industry is the many life policies with minors as beneficiaries. Typically, but not always, minors are named as beneficiaries when a single parent with a minor child takes out a life policy.

A minor child is one who is under the age of 18.

The Administration of Estates Act restricts the payment of moneis and the transfer of movable assets to a minor from a deceased estate only. The act’s restrictions do not apply to the proceeds of a policy that is not paid into a deceased estate, and may be paid directly to the minor (even though the policy proceeds are still a deemed asset for the purposes of estate duty).

Some insurers make such payments, but others pay the money to the natural guardian. Both cases do little to protect the proceeds for the minor, as their natural guardian will have full access to the funds.

Options

Single parents with minor children and life policies should therefore set up a trust. There are two options:

Set up an inter vivos trust to own the policy. Such a trust, set up to own the policy while the single parent is alive, is the most efficient solution. First, it ensures that the proceeds are paid directly to the trust on the death of the parent, without any delay.

Second, if the trust is the owner, premium payer and beneficiary of the policy, then on the death of the parent, even though the policy will still be a deemed asset in the deceased estate and subject to estate duty, the premiums paid for the policy, compounded at 6% a year, will be exempt from duty. This estate duty saving should be more than the cost of setting up the trust.

In addition, a parent with a minor child should in any case set up a trust to look after all the other assets in the estate on behalf of the minor child.

Use a testamentary trust. A testamentary trust (a trust created in the will, and which only comes into operation on your death), can be used to protect the proceeds, but it is not nearly as efficient as an inter vivos trust.

Although this option is better than nothing, it has the following problems:

No estate duty benefit. With the trust only being set up on death of the testator, there can, of course, be no estate duty deduction for the premiums plus 6%. This may not be an issue if the estate and policy proceeds together are below the estate duty threshold of R3.5million;

Delay. The trust cannot be set up until the executor is appointed. This delays the whole process by at least a few months, and means the payout on the policy will be delayed until the trust is set up. The family won’t be able to utilise the proceeds immediately.

Inflexibility. A testamentary trust is less flexible than an inter vivos trust. It is very difficult to amend such a trust without recourse to a court application.

Risk of an invalid will. If the will has not been validly signed, or cannot be found, then the testamentary trust, which is created via the will, cannot be set up.

Beneficiary nomination. This is the main concern. Who is nominated as the beneficiary on the policy, if it is a testamentary trust? The correct wording to use would be “The testamentary trust created in terms of my will."

If there is more than one testamentary trust created in the will, then you need to name and identify the specific testamentary trust.

Note that if “in terms of my will” is used as the beneficiary, then the proceeds will pay into the estate, be subject to executor’s fees and be subject to the winding up process. That should be avoided.

Check with your adviser

It is important to be sure that the insurance company concerned is able to accept “the testamentary trust created in terms of my will” as a beneficiary nomination, seeing as the trust has not yet been registered and does not have an IT number.

Most insurers do accept this type of nomination. You should check this with your financial adviser.

There are many single parents with a minor child or children. You should be aware of the dangers of nominating a minor to be the beneficiary of a policy, and should preferably create an inter vivos trust to own the policy and pay the premiums. In that way, the proceeds will be protected, and there will be an estate duty benefit.

If you cannot afford to set up an inter vivos trust, you should at least name a testamentary trust as the beneficiary. A minor child should not be named as the beneficiary of a life policy — the chances of the proceeds being squandered are too great.

Harry Joffe is head of legal services at Discovery Life