Many people support loved ones financially during their lifetime and need peace of mind that their loved ones will also be taken care of financially after their demise.
Individuals in need of financial support could vary from minor children, a spouse, life partner, someone with special needs, an elderly parent or even a combination of them.
Testamentary trust
The most common way to ensure that your loved ones are taken care of financially after your demise is to set up a testamentary trust in your last will and testament. This trust will only be established once you die.
You of course have to ensure that you leave enough cash, in the form of investments or life policy proceeds, to the trust in order for the trustees, who will manage the trust, to provide financially for your loved ones in your stead.
The benefits of a testamentary trust:
- The trustees will manage the funds and pay your loved ones as they need the funds
- If the trust clauses are drafted correctly, the funds will be protected from your loved one’s creditors or maintenance claims
- Your loved ones will have quick access to funds when needed, for instance medical care, education, etc.
- When your loved one dies and there are still funds in the trust, the balance can go to someone that you determine and not people whom you would not have benefited;
- A trust is also a very good solution for an elderly loved one who has or may have dementia in future as the trustees will be able to take care of the financial management by paying for instance the home carer, a nurse, medical aid, retirement home, levies, rates and taxes etc.
Financial products
Some people bequeath an amount to a loved one who was financially dependent on them in their last will and testament with the proviso that the amount must be invested in a financial product, such as a retirement annuity, to provide for the loved one. Although this is possible in many situations, caution should be taken as there may be many disadvantages compared to a testamentary trust.
The loved one will need to understand how the financial product works and to some extent be able to deal with the funds. It is important to note that, in the absence of careful management, the funds may not last as long as was intended to support the loved one financially after your death.
The costs of some of these financial products may also be high and could be more than what it would have been to manage the funds in a testamentary trust.
If your loved one is an elderly parent, a curator or administrator would need to be appointed at an additional cost to deal with the financial product if your loved one suffers from dementia.
There may also be rules that apply to the financial product that prohibit your loved one from accessing the funds in an event when they are urgently needed, for instance medical care. The funds will most likely not be as flexible as it would be when managed by trustees in a testamentary trust. Another factor that has to be considered is the tax implications of the financial product when funds need to be withdrawn.
Also, if the loved one dies later, the balance of the funds may go to people whom you had no intention to benefit. If for instance the funds had to be held in a retirement annuity, the owner may nominate beneficiaries, but as the trustees of the retirement annuity need to determine who was financially dependent on the owner (your loved one), the ultimate beneficiaries may be complete strangers to you.
It is therefore clear that various options are available to provide for your loved ones financially after your death, but that there are many factors to consider before an informed decision can be made. It is thus recommended that you speak to a fiduciary specialist and financial adviser to ensure that all the facts are considered and the best solution found.
By Angélique Krügel, National Councillor of the Fiduciary Institute of Southern Africa (FISA) and Director, Wealth and Legacy Group.
Contact: angelique@fisa.net.za
