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How single parents can protect themselves financially

Mechanisms that single parents can use to strengthen their financial positions.

The responsibility of being a single parent to a minor child (or children) is no doubt overwhelming, especially when it comes to money. Without the added advantage of running a dual-income household, raising children on your own, funding for their education, while also trying to save for your retirement may appear insurmountable.

As a single parent, it is likely that you don’t have anyone else to fall back on if you hit financial hardship, which makes gearing your finances for any eventuality essential. In this article, we explore some mechanisms that single parents can use to strengthen their financial positions.

Guardianship of minor children

Firstly, it is critical to secure the guardianship of your minor children in the event of your passing, particularly if you are the child’s only natural guardian. You can do this by nominating a suitable person in terms of your will. If your child’s other parent is still alive, they will remain the child’s natural guardian in the event of your death.

A correctly structured will

Making financial provision for your minor children will no doubt be top of mind, and the best way to do this is by ensuring that you have a valid will and that it is correctly structured to provide your children with the protection they deserve. What is important to bear in mind that children under the age of 18 are legally not permitted to inherit. This means that if you bequeath assets directly to your minor children in terms of your will, these assets will be administered on their behalf by their guardian, which could be the child’s other parent or your ex-spouse. To avert such a situation, it is advisable to consider setting up a testamentary trust.

A testamentary trust

A testamentary trust, which can be set up in terms of your will, is perfectly suited to house any assets you wish to bequeath to your minor children. In the event of your passing, the testamentary trust will be formed, and any assets intended for your children will become trust assets. You will be required to set out the details of the trust in your will and nominate trustees who will manage the trust in the best interests of your children if you are no longer around. As the testamentary trust is only formed in the event of your death, your will is the founding document of such a trust. Keep in mind that if for whatever reason your will is found to be invalid, no testamentary trust will come into effect, so be sure to have your will drafted by a fiduciary expert.

A special trust type A for special needs children

If one or more of your children have special needs, such a trust may be considered a special trust Type A which is provided for in terms of Section 18(3) of the Income Tax Act. A Type A trust is created to provide financially for a person (or persons) with special needs such as a severe mental or physical disability. These trusts can be either testamentary or inter-vivos trusts, depending on the objectives of the trust founder, and are an excellent way of safeguarding assets and ensuring that your beneficiary is not taken advantage of – especially when you are no longer around. To qualify as a special person in terms of Type A trust, your child must have a disability which affects their ability to earn sufficient income for their personal maintenance or from managing their own financial affairs. Such a trust must be registered with Sars as a Type A trust in order to enjoy the tax benefits afforded to such vehicles.

Nominate trustees carefully

Whether you set up a testamentary trust or inter vivos trust, be sure to nominate your trustees carefully bearing in mind that their job will be to make decisions in the best interests of your child if you are no longer around. Generally speaking, it is advisable to nominate three trustees with one of them being an independent trustee, while the other two could be family members or friends who are close enough to your child to have a good sense of their needs and what you would want for them.

Income protection

As a single parent, if you are unable to generate an income, you will not have a spouse or partner whose income you can fall back on. An income protection benefit is an excellent way of ensuring that you will continue to receive your income if illness or disability results in a temporary or permanent loss of income. Disability insurance is a highly complex area of financial planning and is best undertaken with the assistance of an independent advisor. Bear in mind that the nature of your occupation may preclude you from qualifying for income protection benefits, and your advisor should be able to assist in structuring other forms of disability insurance for you.

Life cover

Making adequate financial provision for your child in the event of your death will be top of mind for you and will, once again, depend on your personal circumstances. If the child’s other parent is around and financially stable, this could relieve some financial pressure. However, if you are the only parent, you will want to be sure that you have sufficient life cover in place and that the policy is correctly structured. If you have set up a testamentary trust, be sure that the trust, and not your minor child, is the nominated beneficiary on your life policy. This will ensure that the proceeds of the policy will be paid directly to the trust where they will be managed by your trustees until your child reaches the age at which you determined their assets should be held in the trust. If you have group life cover in place, take time to check the beneficiary nomination on this cover as well as if it is an approved or unapproved benefit.

Retirement fund

While putting money away for your child’s education is important, do not neglect your retirement funding. Without adequate retirement funding in place, you could become a financial burden on your child later in life which should be avoided at all costs. Remember, you can borrow money to fund your child’s education, but you cannot borrow money for your retirement. Further, there are a vast array of funding mechanisms for tertiary education that your child can pursue that can alleviate the financial pressure on you.

Support system

Besides the emotional benefit of having a support system, there is the added benefit of cost-sharing. It is very common for single parents to share costs such as tutoring, au pairing, child transportation, baby-sitting, and sometimes even accommodation, so make an effort to engage with other single parents and see how you can support each other.

Emergency fund

Large unforeseen expenses can force you into taking out expensive debt and completely set you back financially. In tough economic times where many people have already had to access their emergency funding, having a pool of readily available cash may seem impossible to achieve. Start with small, steady steps and, if necessary, set up a specially earmarked account to house your emergency cash in. If your child’s parent is not a reliable maintenance payer, try to build up sufficient reserves to cover three months’ worth of maintenance payments just in case.

Medical aid

Medical aids are a high-cost budget item and often a grudge purchase, especially if you and your child are in relatively good health. However, if you or your child needs to be hospitalised for whatever reason, the costs of private healthcare would be prohibitive in the absence of medical aid. At a very minimum, ensure that you and your child are registered on a core hospital plan. There are a number of more affordable network options available to consider if necessary.

ADVISOR PROFILE

Gareth Collier

Crue Invest (Pty) Ltd

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