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How can I ensure my life policies and pension get paid into a testamentary trust?

There's no perfect solution, but here are some options....

I have a will and there is testamentary trust on my will. My daughter is a minor and I have made her a beneficiary of my life policies and retirement fund. Will these be automatically paid into the trust? How can I make sure that all these life policy funds get paid to the trust and not her mother (legal guardian)?

I think it is important to consider what your overall estate strategy is and then look at each individual benefit/asset to ensure it has the best possible chance of meeting your wishes.

I have assumed from your question that your intention is to ensure that your minor daughter receives 100% of the benefits you mention and that you don’t want her legal guardian to have unfettered access to these funds.

In short, nominating your minor daughter as the beneficiary on your life and retirement funds does not guarantee that the funds will be paid into the testamentary trust and we would recommend you don’t do this. 

What other options do you have?

Let’s look at each benefit separately. 

The life policies

With a minor child there are two options, both of which have advantages and disadvantages.

The first option is to nominate the testamentary trust to be set up in terms of your will. Presumably, your will specifies that this trust is only for the benefit of your daughter in her lifetime. The downside of this option is that the life company will need to wait until the trust has been set up before they can make payment, and this could take some time. The beneficiary nomination should read “the XYZ testamentary trust set up for my daughter XXXXX in terms of my will, signed on……”

The second option is to specify that your estate should be the beneficiary of your life policy, but this is only appropriate if your daughter is nominated as the heir of your estate. Also remember that if anyone has a claim against your estate for unpaid debts or other reasons, the life policy proceeds, being paid into your estate, could be used towards settling these debts if necessary. Estates can also take a long time to settle.

Unfortunately, neither option is a perfect solution.

An additional possibility is to nominate a trusted adult to receive a small percentage of the life benefits, with the testamentary trust nominated for the balance. You would need to agree in advance with this person that they are comfortable with the arrangement and will only use the money received from the policy towards meeting your daughter’s financial needs. Ultimately the testamentary trust will be set up and can then receive the remaining funds from the life policy. This does of course require an exceptional level of trust in the person you nominate, as there would be no restriction or control of how they spend the money.

In certain circumstances it may be appropriate to set up an inter-vivos trust now, that remains dormant initially, but which would then be activated upon receipt of your life cover benefits. This could obviously be costly and require ongoing maintenance, and will hopefully never actually be needed, but it means that the trustees can receive the life policy benefit payments sooner and assume the responsibility of managing the money for your daughter’s benefit.

Retirement fund

Nominations on a retirement fund are not as straightforward as those on a life cover policy.

Every retirement fund is governed by the Pensions Fund Act, which makes provision for the appointment of a board of trustees. The trustees are responsible for allocating retirement fund benefits in terms of Section 37C of the Pension Funds Act (the Act*). The intention of the Act is to protect dependants, even over the clear wishes of the member. At its core the Act serves a social function, striving to ensure that no one who was financially dependent on the member is left without support.

The Act defines dependants as spouses, children and anyone proven to have been financially dependent on the member, or entitled to maintenance, as well as anyone who may in the future have become financially dependent on the member.

The retirement benefit is therefore not dealt with by your will but rather by the beneficiary nomination and even so, if you nominated your minor daughter as the 100% beneficiary of the benefit the trustees may overrule your nomination and award an allocation to someone else who may fall into the categories mentioned above.

In short, you cannot be 100% sure that the benefit is paid into the testamentary trust, but you can make some provisions to increase the likelihood of it happening as you wish.

Ideally, you should nominate the testamentary trust (if it has been named in your will) as the 100% beneficiary. You could nominate your estate as the beneficiary, but the key is to avoid nominating your minor daughter. 

Letter to trustees

It would be further advisable to write a letter addressed to the trustees of the retirement fund, setting out the reasons for your nomination of the testamentary trust and why you would like 100% of the benefit to be allocated to the testamentary trust. You could for example give some background to the specific situation and provide information and motivation to the trustees.

It does not guarantee that 100% of the benefit will be paid into the testamentary trust but it does give the trustees some insight to help them make an informed decision. 

Testamentary trust in your will

It is worth mentioning that you ensure that your will makes provision for the appointment of a suitable trustee on the testamentary trust. We would advise an independent trustee and perhaps even a professional trustee that would have experience in dealing with similar situations. Your daughter may be the sole beneficiary of the trust, however, her legal guardian will be requesting funds from the trust and the trustee needs to ascertain and manage these requests.

It would also be advisable if you are amending your will to perhaps give the testamentary trust a name in your will so that you can use the same name in your beneficiary nominations for the retirement funds and life policies.

Do you have any questions you would like answered by registered financial planners?

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If the policy pays into the deceased estate : would it not be subjected to estate duty?

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