Leaving Life Cover To Your Kids Could Be A Huge Mistake
Are you a single parent? Have you left the proceeds of your life insurance policy
to your kids?
Do you realise the problem this creates if your kids are under the age of 18?
Our guess is that you are probably thinking to yourself, “I’m a single parent. I want my kids to get the proceeds of my life cover
, that’s exactly why I took the policy out in the first place.”
Here is the problem, though. If your kids are under the age of 18, then by South African law, they haven’t reached the age of majority (currently 18), and they cannot manage their own financial resources.
This means that someone else has to do it for them. That someone else would be the legal guardian, who in most cases would be your ex-spouse. But perhaps you don’t want your ex-spouse involved which is why you are leaving the proceeds, of your life cover, to your kids, in the first place.
And if there isn’t a guardian, then there’s always the Guardian Fund, run by the state, and unless you trust them completely, you don’t necessarily want them involved, do you?
What if you don’t want any of the above to happen? Then you need to do the following:-
- You need to set up a Last Will and Testament
- Then you nominate your Estate as the beneficiary for the proceeds, and
- In your Will establish a Testamentary Trust to take care of your kids until they reach a certain age.
The problem with doing this is...
Your life insurance
becomes a physical asset in your estate. The executor of your estate is then entitled to:
- Settle the debts of your estate with it, and
- Charge a fee of up to 3, 5% (excluding VAT)
Why not a normal trust instead of a Testamentary Trust?
A testamentary trust is a legal entity which only comes into existence on the founder’s death and which is created for the sole benefit of the founder’s beneficiaries. There are no administration fees payable until the trust comes into being.
An “inter vivos
trust” (inter-vivos means “between the living”), is created during the founder’s lifetime and involves a founder, trustees, audits, and all the associated costs thereof.
If the sole purpose of the trust is to take care of minor children, then a Testamentary Trust is an effective way to take care of them. Unfortunately, it’s also not free of charge and does end up eating away a large chunk of their inheritance.
The iHound Team