How to provide for minor children…

Trinette Burger

Everyone has an inherent instinct to provide for their children’s needs. These needs include emotional wellbeing and guidance, physical wellbeing, financial assistance, education and support. Most people fulfil these needs quite naturally…while they’re alive.

But what happens if you die unexpectedly? Who will then take care of your children’s needs? Have you made provision for your minor children? The first, and most important question to ask, is: “Do you have a Will?”

What happens if you don’t have a Will?

If you do not have a Will, the Intestate Succession Act will apply the default rules as to who inherits what. As far as your children are concerned, this Act provides that they inherit your estate in equal shares with your spouse. This may not be what you want to happen, and it may not be tax efficient. Furthermore, if you do not have a Will and any of your children are under the age of 18, their benefit has to be paid to the Guardian’s Fund. Some of the reasons why this may not be in the best interests of your children include the following:

- The Guardian’s Fund is administered by the Master of the High Court which invests the money with the Public Investment Commission.

- Interest payable on amounts paid into the Fund is calculated at a rate determined by the Minister of Finance from time to time, which can be much lower than the rate that can be achieved had the money been invested elsewhere.

- The Guardian’s Fund’s reputation has suffered recently as a result of recently revealed fraud by corrupt justice officials and syndicates.

- Accessing money from the Guardian’s Fund for ongoing expenses can be time consuming and problematic.

If you do have a Will – what should it cover?

Assuming you do have a Will, the question you need to ask is: “What provisions have I made for my minor children?” Have I nominated a guardian? Does my Will provide for any minor beneficiary’s inheritance to be held in a trust (to avoid the money being placed in the Guardian’s Fund?

Who will look after my children’s daily physical and emotional needs?

If a minor child is left without a natural guardian, a guardian will be appointed by the High Court. Although the High Court will always consider the child’s best interests, it is advisable to expressly nominate a guardian in your Will. Although this is merely a nomination (and not an enforceable appointment), it will be considered when the best interests of the child are decided and may avoid unnecessary disputes over the well-being of the children. You can also exclude the guardian from furnishing security, which will avoid unnecessary costs. When choosing a guardian, there are various factors to take into account. These include geographical, financial, religious, educational and personal considerations. Would you want your children to move to a foreign country to stay with your aunt? Would you want them to go to a different school? Would you want to burden your brother, who already has three children of his own, with another child?

Who will look after my children’s inheritance and financial needs?

Another important aspect to cover in your Will is the provision for your child’s financial needs. In this regard it is advisable to provide for benefits of a minor child to be held in a trust for his/her benefit. The trustees can then apply the trust assets for the maintenance, education and support of your children. You can also provide for your children’s inheritance to stay in the trust for a period beyond the age of majority. This means that the trustees will continue to manage and control the assets until your children reach the age at which you consider they will be competent enough to manage the assets themselves.

Testamentary Trusts v Inter Vivos Trusts

When it comes to bequeathing assets to a trust for the benefit of your children, you can either provide for a trust to be created at your death (testamentary trust) or you can use an existing inter vivos trust (which you set up during your life time). Both these options have their own benefits. An important benefit to consider when using a testamentary trust is that this trust will qualify as a special trust. A “special trust” is defined as a testamentary trust that has been created solely for relatives of the testator, where the youngest beneficiary is under the age of 21. It is important to note that this definition refers to “the age of 21” and not to “minor” and that it refers to a trust where the youngest beneficiary is under the age of 21 and not all the beneficiaries. Such a trust will therefore qualify as a special trust for as long as one of the beneficiaries is under the age of 21. Unlike a normal trust that is taxed at a flat rate of 40%, a special trust is taxed at the same progressive tax rates that apply to natural persons.

If you choose to make use of a testamentary trust, the trust will be created in your Will, which will provide who the trustees will be and what powers they will have. Just like the nomination of a guardian, the nomination of the trustee should be considered carefully. This is the person who will decide, for as long as your children are below the specified age, how your children’s inheritance is invested and when and how much should be spent on their care and maintenance. The same person can be nominated as trustee and guardian, but this often causes a conflict of interest, which can be to the detriment of your children. Also consider whether the person you nominate as trustee has the necessary skills, attributes and experience to manage your children’s inheritance in their best interests.

An inter vivos trust

The paragraphs above focused on the position after your death. However, if you are already making use of an inter vivos trust as part of your estate planning, or should you consider setting up a trust for purposes of estate planning, it is important to understand the main taxation rule applicable to trusts and to correctly apply this rule during your lifetime. Any amount received by, or accrued to a trust will be taxed in the hands of the trust. If, however, the amount is distributed to a beneficiary in the same year that it was received by the trust, it will be taxed in the hands of the beneficiary. An amount will not be taxed in the hands of both the trust and the beneficiary but will either be taxed in the hands of the trust at a rate of 40% or in the hands of the beneficiary at the beneficiary’s tax rate. This basic rule is, however, subject to the anti-avoidance provisions in section 7 of the Income Tax Act. Of special relevance here, is section 7(3) which applies where there are minor beneficiaries involved. This section says that income distributed or allocated to a minor will be deemed to be the income of his/her parent if such income can be attributed to a donation, settlement or other gratuitous disposition made by his/her parent and will be taxed in the hands of such parent. Therefore, if you make a donation, settlement or other gratuitous disposition (this includes an interest-free loan) to a trust and your minor child then receives an amount (that resulted from such donation, settlement or gratuitous disposition), that amount will not be taxed in your child’s hands (at his/her lower tax rate) but in your hands. In this section “minor” means 18 years or under.

In the light of the discussion above, consider the following tips: Stop postponing. Be mindful when drafting your Will. Ensure you get specialist expertise advice. And do not neglect the ongoing process of estate planning.