How to safeguard your minor children's inheritance in your estate plan

Leaving an inheritance to minor children requires careful planning, especially when it comes to selecting appropriate vehicles, structuring beneficiary nominations, and complying with legislation. In the absence of property planning, your children’s inheritance could end up in the hands of unintended parties or be sub-optimally managed.

In this article, we explore how to safeguard an inheritance for your minor children by considering the type of asset, the role of legal guardians, and the benefits of testamentary trusts.

Bequeathing fixed property to a minor child

Our law allows a minor child to inherit fixed property and transfer it with the help of a legal guardian. While this provides a degree of legal protection, it’s important to be aware of the practical risks. Firstly, it’s important to ensure that your estate is sufficiently liquid, failing which the executor may be forced to realise the property to settle your estate’s liabilities, despite your intentions for the child to inherit it.

Further, while your minor child will inherit the property, it is their guardian who has authority over the asset, although these powers are restricted – for instance, the guardian may not realise the assets without approval from the Master of the High Court. 

To mitigate these risks, consider bequeathing the property to a testamentary trust that comes into formation upon your death. The effect of this is that the trust will take ownership of the property, and your nominated trustees will manage it on behalf of your child until they are old enough to do so independently.

The proceeds of life insurance

While life insurance is often used to provide immediate liquidity to beneficiaries in the event of death, keep in mind that children under the age of 18 cannot directly inherit the proceeds due to the limited contractual capacity. If you name a minor as beneficiary to a life policy, the proceeds will be paid to their legal guardian, who will manage the funds until your child reaches majority. This may not be ideal, especially if the guardian is not someone you would entrust with financial decisions.

To provide more structured control, it is advisable to nominate your testamentary trust as the beneficiary of the life policy. Practically, this means that the proceeds will be paid to the trust, which, in turn, will be governed according to the terms laid out in your will. Although there may be a delay while the trust is formalised after death, this option ensures a higher degree of oversight and protection.

Beneficiary nomination on retirement funds

It is important to know that the nomination process for retirement fund benefits differs from other assets because it is governed by Section 37C of the Pension Funds Act. The purpose of this legislation is to ensure that financial dependants are not left without financial support, and the fund trustees must determine who was financially dependent on you at the time of death, and to apportion the funds accordingly. As such, your nominated beneficiaries serve only as a guide to the fund trustees, and there is no guarantee that your minor child will receive the intended funds.

Living annuities and minor beneficiaries

Living annuities are highly effective estate planning tools because they allow for direct beneficiary nomination, and the proceeds do not form part of the deceased's estate. However, a child under 18 cannot legally receive a lump sum or take ownership of an annuity. As such, if you name a minor child as beneficiary to a living annuity, their legal guardian will be responsible for determining how the benefit is accessed.

This includes the option of a full withdrawal or the purchase of an annuity in the child’s name. Either way, the guardian retains discretion over how the funds are managed. As with life policies, naming a testamentary trust as the beneficiary of the living annuity can provide a greater degree of protection and ensure that the funds are managed in line with your wishes.

Discretionary investment and trust planning

Funds held in discretionary investments – such as unit trusts, shares, and exchange-traded funds – must typically be dealt with through your last will and testament. In the case of tax-free investments, whether you can nominate a beneficiary depends on how the product is structured. If your tax-free investment is life-wrapped, you may be able to name a beneficiary, and the funds will bypass the estate administration process, although they will still be included for estate duty purposes.

If your tax-free savings account is held on a LISP platform, however, beneficiary nomination would need to be addressed in your will. In either scenario, however, if your nominated beneficiary is underage at the time of death, they cannot directly inherit the proceeds, and a testamentary trust remains a robust and flexible option for safekeeping these assets for your children.

Planning for minor beneficiaries involves much more than just writing them into your will. Without the ability to contract or manage finances, underage children require carefully considered estate planning structures, particularly when it comes to large or complex inheritances. Testamentary trusts offer an effective way to manage such inheritances, providing oversight and control until your child reaches adulthood.

When developing your estate plan, give consideration to each asset class – property, insurance, retirement funds, annuities, and discretionary investments – and ensure that your will, trust structure, and beneficiary nominations are aligned. Doing so will provide your children with the financial security you intend, without exposing them to unnecessary risk or mismanagement.

* Odendaal is an associate financial planner at Crue Invest.

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