Your retirement fund may think that putting your death benefits in a trust is the best way to serve your dependants' interests. But the costs associated with trusts could well leave them financially bereft.
Your retirement fund's trustees have to think carefully about how they pay out and invest the benefits due to your minor children when you die, a recent ruling by the Pension Funds Adjudicator has shown.
Simply lumping your death benefits into a trust is not the answer, because the costs associated with trusts can dramatically erode the capital.
In order to help the trustees make the right decision, you can inform them in advance whether or not your spouse is financially competent to handle the money due to your minor children when you die.
John Murphy, the Pension Funds Adjudicator, recently took a fund to task over how it paid out death benefits to minor children.
Murphy overturned the fund's decision to place about R63 000 worth of benefits in a trust for a deceased member's four dependants, aged between seven and 16.
The National Provident Fund of the South African Commercial, Catering and Allied Workers' Union (Saccawu) placed just under R16 000 in the trust for each child. The children's guardian received a monthly income from the trust.
Investigations by Murphy's office showed that 7.5 percent in commission was charged every time the trust paid out money to the children. Commissions, investment and management fees, and VAT gobbled up R4 750 of the capital in less than two years after the trust came into existence.
Thandiwe Lukhozi, the children's guardian, complained to Murphy that the money due to her children from her late husband's retirement fund should not have been placed in the trust. Instead, the money should have been given to her in her capacity as the children's guardian.
Naleen Jeram, of the adjudicator's office, investigated the complaint.
Jeram says that, in terms of the Pension Funds Act, trustees have to distribute a deceased member's death benefit equitably among his or her dependants. Trustees are permitted to instruct that the benefit be paid into a trust to preserve the capital and to ensure that an income is generated.
But whether it is appropriate to place a benefit in a trust depends on the circumstances of each case. Trustees must, for example, consider a guardian's competence to handle money on behalf of a minor child or children, and the financial viability of placing a benefit in a trust.
If the costs of a trust - which is usually managed by a trust company - are excessive, or the trustees decide for any other reason that it is inappropriate to place the benefit in a trust, the money can be paid to the guardian of the children.
Alternatively, the law allows the fund to retain the benefit and pay it out in instalments, including any interest linked to what the fund earns on its investments.
The Saccawu provident fund's board of management said it placed the children's benefits in a trust "after establishing that all were beneficiaries as described by law". It said this was done after "full consultation" with Lukhozi.
But, Jeram says, after being in existence for less than two years, the trust consumed R4 750 in costs which were deducted from the capital.
To date, these expenses represent 7.6 percent of the initial capital paid into the trust. The trust is managed by Syfrets Trust.
These charges will continue, and perhaps increase, until the trust is terminated. Bearing in mind that the youngest child is seven years old, the trust will potentially be in existence for another 14 years - until that child turns 21.
Jeram found it would be more appropriate for the provident fund to either give the money to the children's guardian, or to pay out the benefits in instalments, thereby avoiding the excessive expenses associated with a trust.
Murphy overturned the fund's decision to place the benefits in the trust and gave the fund six weeks to consider an appropriate, alternative method of payment.
The fund has to report its decision to his office before Murphy will hand down a final ruling in the matter.
Jeram says this case highlights the important role played by trustees of retirement funds in the distribution of death benefits, especially when minor children are involved.
The case emphasises that it is essential for retirement fund trustees to fully investigate the initial and ongoing costs of a trust (including commissions) before placing a benefit with a trust company.