Managing your money is important at any stage of your life, but, when you become a parent, a lack of planning no longer affects just you, it has serious consequences for your children.
The single parent
With about half of South Africa’s mothers raising children on their own, planning for their children is even more important.
Leighanne Decker, who is single mom Maryke’s adviser, says that, when it comes to the guardianship in a will, it can be a challenge if the other parent is alive. In South Africa, the natural parent is always the preferred guardian, unless there is a known reason they can’t be and they have been declared unsuitable.
“All you can do as a single parent is nominate an alternative guardian in the event the natural parent fails to accept responsibility for the minor child,” says Decker.
When selecting a guardian, it is important to choose someone who is willing to take this responsibility on and who you know will have your child’s best interests at heart. “Have a discussion with the person beforehand, and be open about how you are providing for the maintenance of the minor child, so, if the event should happen, there will be no surprises.”
In Maryke’s case, fortunately the relationship with her previous partner is sound and, where their daughter is concerned, they are able to make joint decisions without issue.
However, for parents in a situation where the other parent does not have a relationship with the child, the absent parent may change their mind if they know that there is money involved, so it is important that the money is protected to ensure it provides for the child’s needs.
“I recommend that, even in Maryke’s case, where she has a sound relationship with the father of her child, a testamentary trust be established for the protection of the minor child in the event of her death. This will ensure that what you have left for your child will be protected for the minor child and cannot be used at the guardian’s discretion,” says Decker, who adds that another consideration is beneficiary nominations on polices such as life cover.
“Often a mistake is made with beneficiary nominations for life cover policies, making a minor child the sole beneficiary. The insurance company will request a bank account in the minor child’s name, which has to be opened by the guardian of said child, thus giving that guardian 100% access to those funds,” says Decker.
Some parents put the policies in the child’s name to avoid payment into the estate and the accrual of executor fees, however, Decker recommends that one rather nominate the estate as the beneficiary and pay the fees. This way, the funds are paid into the testamentary trust to ensure that the minor child is protected. One can also select an age when the trust terminates – for example, at 25.
Decker says costs should be taken into account, as a trust will have both establishment and running costs, thus ensuring that there is sufficient capital to put into a trust. The Guardian Fund can be used for smaller estates, however, that can be an administrative nightmare as it is managed by government. Some retirement funds require the retirement benefits to be paid into a beneficiary fund if they are concerned about the ability of the legal guardian to manage the finances. The guardian is then paid a monthly income from the fund to provide for the child.
“In Maryke’s case, there is sufficient capital in the event of her death to warrant a testamentary trust. Once her daughter reaches the age of majority, Maryke will need to review the will and beneficiary nominations,” says Decker.
Planning as a couple: Having a will in place is equally important when raising children together. Married couples can leave their estate to each other, with a provision that if something happens to both parents at the same time, the children will be provided for. Under current law, there is no estate duty or capital gains payable when you leave your assets to your spouse.
The R3.5 million estate duty exemption is rolled over to the surviving spouse’s estate. This means that, on the death of the second spouse, no estate duty would be paid on the first R7 million. In some cases, a parent may choose to leave the R3.5 million tax-free portion in a testamentary trust for their children, to safeguard against future relationships the surviving spouse may enter. If the surviving spouse remarries in community of property, half the estate will belong to the new partner.
Understand your marriage contract: Your marriage contract supersedes your will. If you are married in community of property, you may not bequeath your full estate to your children because, technically, your spouse owns half. Keep in mind that if a property is registered jointly, it will still need to be re-registered if an owner passes away.
Update your retirement fund nomination form: This provides trustees of the retirement fund with information about your dependants/beneficiaries and makes it quicker to pay out. Keep in mind that trustees of your retirement benefits can override your wishes, as they must consider all financial beneficiaries. In the case, for example, where you have a minor child from another relationship, the trustees can allocate a percentage of your retirement benefit to that child, even if not stipulated on your nomination form. Make sure your nomination form takes all your financial dependants into account.
Provide for your family: Make sure that, between your retirement funds and life cover, you are making sufficient provision to support your children as well as their future education.
Control environmental officer Nocawe and her husband both have life cover and critical illnesses insurance that can cover all their debts and provide additional funds for the children to build wealth.
Complaints investigator Audrey has four children of varying ages, so she needs to provide differently for each child:
“What my adviser Sonja pointed out is that my older children, especially ones who are in tertiary, like my eldest daughter, would need less from me financially should something happen to myself or Michael. My will now provides a higher percentage of money left to the younger ones and less for the older ones. I had never seen it in this light until Sonja brought it to my attention.”
However, Audrey adds that, when it comes to assets such as property, this will still be shared equally among the children, regardless of age.
Provide for those fees: Ensure your life cover provides for your outstanding debts, taxes and fees, otherwise it will eat into your children’s legacy. You should at the very least have cover that will settle all debt if something happens to you. Currently, estate duty of 20% is payable on the value of an estate that exceeds R3.5 million, and capital gains tax applies on any gain in excess of R300 000, apart from the primary residence, which has an exclusion of R2 million capital gain. Nocawe will also need to consider capital gains tax on her investment property if she leaves that to her children.
“Negotiate your executor’s fees with your nominated executor. However, make sure you have this in writing, either as part of your will or as a signed instruction that you can attach to your will. Negotiation can happen when you are alive, not at execution stage,” says Decker, who suggests getting professional advice when writing up a will, especially when children are involved.
“Professional executors know the procedure, understand the complications that can arise and will ensure your will is drafted in such a way that your wishes are clear and not open to misinterpretation. Having an estate plan conducted when you have your will drafted will show you exactly where the costs are and what they are, allowing you to make a plan to ensure these are paid.”