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Trust decision was ill considered

11 March 2008 Gareth Stokes

Last week the Pension Funds Adjudicator, Mamodupi Mohlala, ruled that the respondents in a death benefit case were too hasty in placing the full amount of the death benefit in trust. A K Kowa (the complainant) alleged that Corporate Selection Retirement Fund (the first respondent) and Liberty Life (the second respondent) incorrectly denied her full access to the death benefit despite her being named 100% beneficiary.

The Pension Funds Adjudicator (PFA) noted that the issue in this case was to determine “whether the board of trustees exercised its discretion properly and reasonably in deciding to place the minor child’s share in a trust.”

Deceased never updated his nominees

The deceased, worked for Paul’s Muesli CC from 1 November 2000 until he passed away on 25 November 2005. The total lump sum benefit payable upon his death was R62 158.47. This amount became available for distribution to his beneficiaries. It emerged that the deceased had nominated the complainant to receive 100% of his death benefit on 21 November 2000. The deceased subsequently got married and had a child – both events occurring after the complainant was nominated to receive the deceased’s death benefits. When he died the deceased had one legal dependent, Kabelo Kowa (aged four). The deceased’s wife had also passed away.

Presenting for the second respondent Mrs CP Makenete “indicated that legal dependants are considered before nominees in terms of section 37C of the Act. In this matter, she pointed out that the complainant is only a caregiver for the deceased’s minor child and she is not a legal guardian.” On Makenete’s recommendation the board thus made a token payment of R3 000 to the complainant before establishing a trust for the benefit of the deceased’s minor. The trust made for provision for R300.00 per month income to be paid to the caregiver – and a sum to be paid toward school fees.

At first glance it appears the board had acted in line with the requirement that “the best interests of the minor child are paramount, and prevail over all other considerations.” But on closer inspection they erred when determining the relationship between the minor child and the complainant.

What constitutes a guardian?

The trustees made their decision on benefit distribution based on the fact the complainant was a care giver. After due consideration, the PFA found that “the complainant was in the same position as that of a natural guardian.” And this causes some problems with the way in which the board applied their mind to the distribution of the death benefits.

The PFA states: “the only reason advanced by the board for its decision to place the minor’s share in a trust was because the complainant is not a legal guardian of the minor.” If the board had realised the complainant was in fact a natural guardian they would have had to conduct a more detailed investigation to determine the complainants “ability to administer the financial affairs of her grandchild, her qualification and the nature of her relationship with the minor child.” During the determination the PFA also asked questions about the appropriateness of making use of a trust given the cost implications and the amount of money involved. She felt the board had neglected these highly relevant considerations in making their initial decision.

Six weeks to reconsider

In section 37C (2) (3) the Act states that the benefit be paid to the guardian of the minor, “unless there are cogent reasons for depriving the guardian of the duty to take charge of her/his minor child’s financial affairs and the right to decide how the benefit due to the minor should be utilised in the best interests of the minor child.”

Thus the PFA ordered that the decision taken by the board of the first respondent to place the minor child’s share in trust be set aside. She went on to recommend that the Corporate Selection Retirement Scheme should reassess the mode of payment to the deceased’s minor child in light of the factors mentioned in the determination. The most compelling of these was that the complainant could be viewed as a natural guardian of the child. And finally, “the first respondent was further directed to determine whether the complainant should be deprived of the right to administer monies on behalf of the deceased’s minor child having regard to the factors stated in this determination within six weeks of the date of this determination.”

The ruling is interesting in that the PFA has not recommended an appropriate board action. She has merely instructed the respondent to reconsider their initial decision given a slightly different set of circumstances. If the respondent determines that the complainant is not ‘fit’ to administer the funds on the child’s behalf it could surely make the same decision. And that means we may not have seen the last of this case!

Editor’s thoughts:
This case has been described as a landmark ruling. However, on closer inspection it seems the determination deals with assumptions around the relationship between the caretaker and the deceased’s minor child. Do you think the amount of R62 158.47 could be effectively managed in a trust? Add your comments below, or send them to gareth@fanews.co.za

The full determination can be viewed via this link

Comments

Added by JM, 14 Mar 2008
I really hope that this decision will be strenuously challenged; alternatively that the Pension Fund Adjudicator's Office be made to sign as surety for the minor.
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Added by D'Arcy, 13 Mar 2008
Will the Pension Fund Adjudicator stand in for the minor in the event of the "caretaker" squandering the money or using it for his or her own means?
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Added by Cathy, 12 Mar 2008
This ruling makes no sense. The "care-giver" is not legally appointed and should the funds be paid to her, then those funds are legally hers to do with as she pleases and should she pass away, those funds go into her estate and does not pass to the child. A trust is a proper vehicle to place funds into and provides protection for the assets of the beneficiary. Trustees have an onerous task already without placing more obsitcles in their way.
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Added by LJ, 12 Mar 2008
The PFA referred to the complainant being deprived of the RIGHT to administer the minor's funds, and that she could be seen as a "care-giver". Without seeing the reasoning for this (the ruling does not yet appear on the PFA site), it is difficult to understand how the complainant simply became the de facto natural guardian. In this case, Bill and PC are correct - if the trustees make such a decision that is not backed by law (as opposed to the PFA), and the family close in and strip the grandmother of the funds (as has happened before), the minor will likely have a recourse against the trustees for having acted unlawfully in settling the entire capital on the complainant. Guardianship does not just exist in the air - it derives from parenthood (natural); from being allocated by a parent; or from the court. It may not just be assumed by someone, no matter how well-intentioned.
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Added by Gilbert Alfonso, 11 Mar 2008
Given the fact that R62000 is nt a lot of money I have had a personal experience in a few cases where the tendency is to spend the money as the recipients cannot think further than today given their lack of education, etc. I would support the board and keep the funds in trust. Once the guardian has misapproprriated the funds what recourse is there then? The R300 pm equates to 8% drawdown after payment of trust fees of 1,5% per annum.
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Added by Chris Breytenbach, 11 Mar 2008
No, I don't think it could be effectively managed because of the amount in question. How else should it be invested though? The only atlernative that I can think of is to issue a life annuity in the name of the child, the income of which is then payable to the "guardian" until the child reaches 18 or 21, at which stage the income reverts to the beneficiary (child).
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Added by Mmagauta Molefe, 11 Mar 2008
The amount is not a lot. The caretaker would use it. Putting in in trust and paying the monthly R300.00 was fine. This is the only way we can enforce financial education on people, to use minors' benefits in the correct way. A lot of minors are loosing on guardians who take their benefits and use them as they like.
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Added by Tim Jones, 11 Mar 2008
Even though trusts are expensive to run, my experience with similar situations show that it is the best way to protect the interests of the minor children.
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Added by PC, 11 Mar 2008
I read about this case yesterday and was amazed at this short-sighted ruling. Being an Employee Benefits consultant and Principal Officer, this ruling has brought about a whole new set of considerations. You may recall a ruling a year or so ago, where the adjudicator ruled that it should not be an automatic transfer to a Trust. I agreed that under certain circumstances the trustees could have paid benefits directly to the guardian. In some cases it was to avoid the difficult decision, as the capital would be afforded protection in the Trust, if there was a dispute later on the distribution of the death benefit. In this case a caretaker has no legal responsibility to look after the child. So if the caretaker passes away or disappears with the money, there could be a comeback to the trustees. It concerns me!
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Added by Bill, 11 Mar 2008
A proper legal guardian may only be appointed by the High Court and requires an application to the court. I am currently dealing with a case where the deceased's sister is the "care giver". An application has been lodged with the High Court but this may be opposed by the child's biological father who was never married to the deceased. In a previous case we had a Grandmother appointed as guardian but she has no access to capital only income to provide for the child and herself. Any other course of action would not be legally defensible. A board of trustees and the PFA does not trump the High Court of SA!
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