Need an umbrella?

This article by Fairheads Umbrella Trusts is the first in a series aimed at raising education levels around umbrella trusts.

Intermediaries and brokers may need to advise clients from time to time on how to dispose of Section 37c death benefits upon the death of a member of a retirement fund.

This is particularly so because the Aids pandemic has significantly affected risk benefits over the past few years, and this trend is likely to continue.

Intermediaries need therefore to know about the various options open to the trustees of retirement funds whose fiduciary responsibility is to ensure that the best alternative is selected to suit the needs of the dependants.

Options include:

* Pay the benefit directly to the dependant

Where a dependant is a major, the benefit is normally paid over directly to him or her. There are two provisos: if the major dependant has a legal disability (i.e. is under curatorship, or mentally handicapped); or, if the major dependant consents, then the benefit can be administered in trust or within the retirement fund.

* Pay the benefit to the legal guardian of the dependant

If the dependant is a minor, a benefit payment can be made to the guardian. This may be a practical option, particularly if the payment is relatively small.

There are potential drawbacks, however, such as :

- Determining the identity of the legal guardian.
- The guardian may not be competent to manage the funds.
- The guardian may misuse the funds or use them for self-benefit.
- Trustees could expose themselves to possible subsequent litigation from a dependant for paying a benefit to an incompetent guardian.

* Administer the benefit within the retirement fund

A benefit payment can be retained within a fund, particularly where the dependant is about to attain the age of majority.

Drawbacks to this option however include:

- Retirement funds do not generally have an adequate administrative infrastructure.
- If the service is not properly costed, existing members of the retirement fund cross-subsidise the service.
- Dependants’ needs are generally not met as a result of lack of focus on this service and inappropriate investment strategy.

Past experience of this practice has led to extensive administrative problems.

* Pay the benefit over to the Guardians Fund under the management of the Master of the High Court

- This option results in poor investment returns, inadequate service, and limited access to funds. In our view, this is not a responsible option.

* Pay the benefit into an umbrella trust

- Awarding funds to an umbrella trust managed by a trust company in most cases is the optimal solution, for the following reasons:-

* Trust companies are specialists in trust services, and have the administrative platform to properly manage benefit payments.

* Funds are legally held in trust where it is the responsibility of the trustees of the umbrella trust to ensure that dependants’ interests are protected.

* Trusts offer enormous flexibility with regard to capital and income distributions.

* The needs of individual dependants are addressed through personalised service and tailored individual investment strategies.

* The legal responsibility no longer vests in the trustees of the retirement fund, but rather in the trustees of the umbrella trust.

* Institutional investment returns are achieved.

* Costs are competitive, when compared to the alternatives.

* Dependants receive personalised advice from the trust administrators whose sole focus is the well-being of the dependants.