Non-retirement fund benefits – what can happen upon death

When it comes to the inheritance of minor heirs upon the death of a parent, the treatment of financial benefits varies depending on the type of benefit. There are typically two different types of benefits: those emanating from retirement funds (the retirement fund credit and so-called approved group risk insurance cover provided by the retirement fund); and non-retirement fund benefits/assets. This article focuses on non-retirement fund benefits and how these can intentionally or unintentionally be dealt with upon death.

The diagram below sets out the situation. 

Note that retirement fund benefits fall outside your estate but non-retirement fund benefits are dealt with in your estate. This leads me to the first and absolutely vital point to make, which is that you need a will. It is astounding how many people in South Africa do not have a valid will. This is perhaps the most important document you will ever have drawn up in your lifetime and it is advisable, even if your estate is small, to obtain expert advice.

Not only does your will set out how you would like your assets to be distributed upon your death and, in particular, how you would like your minor children to be cared for, it also lifts the massive administrative burden of dealing with intestate succession on those you leave behind. For this article we will assume that a valid will has been drawn up.

Winding up an estate

Regarding the winding up of a deceased estate, note that there are two different processes; one for estates below the value of R125 000, referred to as “Section 18(3) Estates” and one for estates above the value of R125 000. In the first instance there are not many formalities to be met and most family members can attend to the process themselves. When the value of the estate is above R125 000, the Administration of Estates Act sets many requirements which have to be met by the executor of the estate

The importance and role of the executor

The executor has a highly responsible role to play as they literally “step into the shoes of the deceased” and will have full power to deal with the assets as they wish. Anyone may be nominated as an executor of an estate, but it is important to note that the Master of the High Court will not appoint anyone in the event of death unless the executor or agent is qualified to comply with all the various laws and provide security for the full value of the estate assets if required. If one prefers to appoint a spouse as executor, she or he normally then appoints an agent to assist as that agent will have the necessary expertise.

The executor needs to obtain a Letter of Executorship from the Master before they can start winding up your estate (a process which unfortunately is currently a lengthy process arising partly from delays and maladministration at the Master’s Offices around the country).  Essentially, the Letter of Executorship confirms the executor’s legal right to manage the deceased’s assets, pay debts, and distribute the remaining assets to the beneficiaries named in the will or as per the laws of intestacy if there is no will.

Directing the executor

It is common practice for testators in their will to stipulate that a testamentary or will trust be set up to cater for their minor children. Here, a trust deed needs to be drafted and registered, trustees need to be appointed and the administration and investments overseen by them,  typically through a trust company or similar. Typically, a monthly income will be paid to the guardian/caregiver and capital requests disbursed on request for expenses such as education fees or medical needs, with the residue paid out to the beneficiary when they reach the age of majority or such age as provided for in the trust deed.

An umbrella trust is a very powerful alternative to a stand-alone trust as it is cost-effective with an existing professional board of trustees and no need to register a trust deed (another process that is delayed on account of the state of the Master’s Office). 

An alternative to a trust is for the testator to appoint a guardian to accept monies on behalf of the minor child. For example, a spouse could appoint the surviving spouse in the event of their death. This may all sound well and good but there are often unforeseen risks involved: the minor’s assets will form part of the guardian’s estate and could be claimed by creditors in the event of bankruptcy; also, will the guardian ringfence the sum and make sure it is used for the specific child for whom it is intended?

What if you die without a will?

It is not a desirable option to die intestate, that is without a will. This is because the residue of your estate (after payment of debts, costs and taxes) must be distributed to heirs under the Intestate Succession Act of 1987, which may not reflect what you may have intended. See below for the rules of intestate succession.

If there is no will, there is no nominated executor to wind up the estate. The family needs to approach the Master to appoint an executor after consultation with interested parties. Furthermore, a minor child’s inheritance will be paid into the state-run Guardian’s Fund which is unfortunately less than ideal for managing inheritances for minors.

The main disadvantages of the Guardian’s Fund include: bureaucratic hurdles in accessing funds, potential delays in processing claims, relatively low interest rates compared to other investment options, concerns about security and administration issues, and the need to justify every expense to the Master of the High Court when withdrawing money for a beneficiary’s needs, potentially impacting their quality of life.

Review your will regularly

If one thing is clear, it is vital that you draw up a will, with the help of an expert, to ensure that your wishes are carried out as you intend. It is also important to review your will regularly, ideally every year, but certainly upon life-changing events such as marriage, divorce or the birth of a child.

The rules of intestate succession

These laws in essence set out who receives the assets/benefits. Put simply, the money is paid out in order as follows:

• The spouse of the deceased (it is unlikely that the child would have been married), then
• The descendants of the deceased (it is unlikely that the child would have had children of their own), then 
• The parents of the deceased, then
• The siblings of the deceased (only if one or both parents are predeceased), then
• Extended family (nieces, nephews, aunts, uncles or cousins).

In circumstances where the child has no spouse, no children, their parents have predeceased them, and there are no siblings and no relatives, the estate will be forfeited to the state.