The majority of mothers in South Africa are raising their children alone, according to statistics collected by the Old Mutual Savings & Investment Monitor. It is not surprising that one of the most common questions we receive from single mothers is how to provide for their children financially should she – the sole breadwinner – die unexpectedly.
For example, Isabella wrote to City Press to ask how she could protect her assets for her daughter: “I have a house and some savings that I want to leave to my five-year-old daughter. I also have a life policy for her. Can I leave the house to her in the will or do I need a trust?”
In most cases, these assets would be in the care of the guardian until the child turns 18. But what if you do not trust the guardian to make the right decisions for your child? How do you ensure that your wishes are carried out?
As a single parent, the most important thing you can do is have a will with a testamentary trust that comes into effect when you die. All your assets – including any property – would be transferred into the trust to provide for your children. You can also organise for your life cover and even your retirement benefits to be transferred into the trust. The trustees then use the funds to provide for your child’s day-to-day living costs. Any money that is still available is paid to the child at age 18 or at any other nominated age. You could, for example, only allow your child access to the funds when they are 22 or even 25.
As a single parent, the most important thing you can do is have a will with a testamentary trust that comes into effect when you die.
The problem, however, are costs and administration. Executor fees can be as high as 3.5% of your assets (including your property) and, as Alex Simeonides, the CEO of Capital Legacy, points out, this creates a situation where a portion of the life cover or investments is used to settle fees rather than to provide for the children.
He says that an executor fee as a percentage of the value of the assets creates an incentive for the executor and administrator to overvalue the assets of the estate to earn higher fees.
Administrators of the estate also charge an ongoing fee of 6% of income accrued and collected after your death. This can lead to a conflict of interests where the executor could drag their heels when it comes to winding up the estate. There are also ongoing fees relating to administering the testamentary trust, which can eat into the money you left to your child or children.
This week, empowerment investment holding company African Rainbow Capital took a 25% stake in Capital Legacy, which aims to provide cost-effective estate planning solutions.
Simeonides says he started Capital Legacy after his experience as a financial adviser, when he would witness the impact of estate fees on surviving family members, as well as the number of people who die without a will.
“For every 10 life policies sold, maybe one will is written, yet what happens to the proceeds of that life policy if there are minor children?” asks Simeonides, adding that inefficiencies in estate planning could result in as much as 30% of the value of the estate being used to cover costs.
“Furthermore, execution could take years and not months to conclude in the absence of adequate planning. This poses several financial risks to the dependants of the deceased. These include financial concerns such as a lack of liquidity to settle debts, estate taxes and other legislated costs relating to the administration of the estate.”
Capital Legacy provides a full estate planning service, from writing up a will to execution, but its key selling point is an insurance policy that fully covers the cost of the administration of the estate. This can include the cost of administrating the testamentary trust in the case of minor children. Simeonides says that, due to efficiencies gained through technology, the costs are significantly reduced. For example, the fee to administer the testamentary trust is only 0.65% a year.
How it works
There is a calculator that calculates the executor fees, property transfer fees and testamentary trust fees based on your current estate. A policy value is recommended, which would pay out to settle all fees without using any of the life cover benefits meant for the child or spouse.
For example, in Isabella’s case, she could take out a policy for R150 a month, which would cover all the fees, including those related to the management of the testamentary trust, until her daughter is 22. This is equivalent to more than R380 000 in fees.
The policy indemnifies the administration costs as these have been calculated and agreed to with Capital Legacy upfront, so there is no vested interest in overvaluing the assets of the estate or in dragging things out when it comes to winding up the estate. In fact, it is to the benefit of Capital Legacy to wind up the estate as quickly as possible.
It is important to note that this cover does not include any estate duty taxes or capital gains tax that may accrue on your death – it only covers the administration of winding up an estate and ongoing administration for a testamentary trust.
Simeonides recommends that you select a close and trusted family member or friend to be a co-executor. In the case of the testamentary trust, the friend or family member would be a trustee along with Capital Legacy. The family member or friend will know the needs of the child, while Capital Legacy will ensure the funds are used appropriately and will manage all the admin.
Taking care of your child when you no longer can is all about planning and making sure you have the right checks and balances in place.
What happens to retirement funds?
If you die without a will or testamentary trust and have minor children, your retirement benefits may be transferred to a beneficiary fund, which has a fiduciary responsibility to manage the money for the child’s benefit and pay out a monthly “stipend” to maintain and educate the child. However, this is only available to people with private company pensions or retirement annuities.
For members of the Government Employees’ Pension Fund, the money is transferred to a guardian fund, which is managed by government unless you provide an alternative such as a testamentary trust.