Are your children the beneficiaries of your life insurance?
Do you realise the problems this creates if they’re under 18?
Since they haven’t reached the age of majority (currently 18), they cannot manage their own financial resources.
This means that someone else has to do it for them. That someone else would be the legal guardian, who in most cases would be your ex-spouse. And I’m assuming there’s a perfectly valid reason why you haven’t made them the beneficiary of your life insurance, right?
And if there isn’t a guardian, then there’s always the guardian fund run by the state, and unless you trust them completely, you don’t necessarily want them involved.
What if you don’t want any of the above to happen?
- You need to set up a Last Will and Testament
- Then you nominate your estate as the beneficiary for the proceeds, and
- In your will establish a Testamentary Trust to take care of them until they reach a certain age.
The problem with doing this is…
Your life insurance becomes a physical asset in your estate. The executor of your estate is then entitled to:
- To settle the debts of your estate with it, and
- Charge a fee of up to 3, 5% (excluding VAT)
Why not a normal trust instead of a Testamentary Trust?
A testamentary trust is a legal entity which only comes into existence on the founder’s death and which is created for the sole benefit of the founder’s beneficiaries. There are no administration fees payable until the trust comes into being.
An “inter vivos trust” (inter-vivos means “between the living”), is created during the founder’s lifetime and involves a founder, trustees, audits, and all the associated costs thereof.
If the sole purpose of the trust is to take care of minor children; then a Testamentary Trust is an effective way to take care of them. Unfortunately, it’s also not free of charge and does end up eating away a large chunk of their inheritance.
But that’s an article for another time.
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please give us a basic valid will with the relevant clauses so we can fill in and keep. shan
Hi Shan,
Unfortunately we don’t offer a simple “fill in the blanks” will template. For that you might want to approach a stationery retailer.
For a single person with no assets the “fill in the blanks” route might make sense but when a person owns any assets, it’s important to have a will drawn up by an attorney.
As I’m not an attorney, and not familiar with your needs and circumstances, I wouldn’t feel comfortable in publishing something like that.
That being said, we do offer a professionally drafted will at no charge to clients taking out their life insurance with us…so when you’re in the market for life insurance remember us, and we’ll wrap your will up at the same time!
Lawrence
question: beneficiary of life policy is different to beneficiary on will. Life policy beneficiary is wife, will states beneficiary to be adopted daughter. who gets the proceeds? Where is this in legislation or court rulings?
Hi JM,
The proceeds of your life insurance policy does not fall under the ambit of your will unless you don’t nominate a beneficiary.
In that case the proceeds will be paid to your estate and used firstly, to settle any debts, and secondly, as an inheritance.
If you wish for your adopted daughter to receive the life insurance benefits then you would need to nominate her as the beneficiary for proceeds.
An easier way to understand this is by looking at a cession.
If your daughter is the heir in terms of your will, BUT, you cede your life insurance policy to the bank for a loan, then the bank has first claim to the proceeds of your life insurance regardless of who is the beneficiary of your will (or whoever the nominated beneficiary of the life insurance is for that matter).
Your will is merely a document which speaks for you when you no longer can. It states your last wishes and who gets to inherit what.
All creditor claims will need to be settled by your estate before any heir can inherit in terms of your will.
Lawrence
Hi
If you are under debt review, what happened when you passed away?
Hello Isaac,
Your creditors, instead of claiming against you, will now claim against your estate. They submit their invoices to the executor. The executor then settles all debts from the cash available in the estate. If there is no cash available, then your fixed assets are liquidated in order to settle expenses.
If there are no fixed assets then you have an insolvent estate and the debt is written off.
Hi Lawrence, fortunately we are not single parents but my husband and I were discussing the scenario if we both passed away and what the best option would be for our children. Set up a Testamentary Trust or let the legal guardian (his brother) control the inheritance? Thanks for all the great advice!
Hello Nicky,
Thank you for the great comment!
It boils down to whether your brother is handling his own money correctly. And remember that if he’s married there’s also his wife to think about. A possible divorce could have unintended consequences for you. I’d always recommend the Testamentary Trust but you need to know that it eats up a large portion of the available cash.
I will be writing an article soon giving you an idea of the cost, so keep reading!