By Johan Strydom, Trust Product Head
Life assurance plays an important role in estate planning. In its simplest form it can provide for the future well-being of loved ones after death. This is especially relevant for parents who have to consider and plan for the future financial support of their minor children when they are not around to do so. Few parents, however, understand the complexities of life assurance payable to minors and how the proceeds of a successful claim are dealt with.
Let us consider the different options available to policy owners.
Nominating a beneficiary on a life assurance policy seems like the obvious thing to do. Afterall, it's easy to understand and nominating someone to receive the policy proceeds in the event of the policy owner's death, is a straightforward process.
Where the proceeds of a policy is payable to a minor beneficiary, legally the life assurer cannot make payment directly to a minor, as a result of the limited legal capacity a minor has to receive the funds. Instead the life assurer will pay the policy proceeds over to the child's legal guardian as a full and final settlement. The problem with this is that there is no guarantee that the funds will be managed and used for the benefit of the minor and itis highly unlikely that this outcome was the objective of the policy holder when taking up the policy.
Consider, as an example, divorced spouses, where an ex-spouse could receive policy proceeds intended for a minor due to the fact that he or she is the legal guardian.
Where a policy is payable to a deceased estate, the proceeds can only be paid over by the life assurer when the Master of the High Court has appointed an executor.
Making a life assurance policy payable to the deceased estate of the policy holder in which a testamentary trust was created, is also not an ideal solution for minors who might require immediate access to funds, given that the estate administration process needs to be finalised before the funds can be paid over to the testamentary trust. In addition, the funds could be used towards liabilities and costs in the deceased estate, which might result in the minor beneficiary not receiving the full benefit of the funds.
The proceeds of the policy in this scenario only flow through to the trust on distribution from the estate - a process that can easily take longer than six months. This means that the funds will not be accessible until distribution to the trust.
It's clear that the traditional way of dealing with minors and life assurance is not ideal. So what is the solution?
A living trust (inter vivos) might be the ideal solution. This is a trust that is already in existence before the policy holder's death, that could be nominated as beneficiary on the policy. However, traditional living trusts are expensive to create and to maintain, and very few policy holders will have access to their own living trust.
Fortunately, FNB Fiduciary has created a solution for all FNB Life policy owners; the Minor Beneficiary Trust. This is an Umbrella Trust that has already been created and registered with the Master of the High Court.
An umbrella trust is a cost-effective, professionally administered trust that provides for the management of many sub-accounts for beneficiaries with similar needs and objectives.
The benefits of the Minor Beneficiary Trust include:
Key takeaway
The Minor Beneficiary Trust solves for real client concerns and an estate planning blind spot for many advisers.
FNB Fiduciary (Pty) Limited Registration Number 1986/003488/07- A subsidiary within the FirstRand Group of Companies. An Authorised Financial Services Provider.
