We see too many parents purchasing a living annuity with their retirement money and then spending retirement barely making ends meet in order to leave a legacy. Alternatively, we see retirees sell their home and give the children money to build a granny flat only to find that when the child gets divorced or dies, the parent is left homeless.
In the words of Benjamin Franklin, “if a man empties his purse into his head, no man can take it away from him. An investment in knowledge always pays the best interest”.
The first step towards leaving a legacy is to provide for your children’s education so that they are able to become the captains of their own futures.
Provide for young children
Parents of younger children who are still financially dependent, need to ensure they have a testamentary trust in place in the event of the simultaneous death of both parents, or if you are a single parent.
While it may seem easier to leave the benefits to a beloved sister, for example, who will care for your child forever, you need to remember that you don’t know what path her life will take. If she gets married, will the benefit be safe upon divorce? Who will decide how to invest the money? What if she runs up debt – is the money protected? A testamentary trust is an ideal vehicle to safeguard an inheritance for the use of caring for your children until they come of age.
Select your trustees carefully
Consider who the trustees should be. There is merit in having a professional trustee on board to administer the finances as this eliminates a source for future conflict in the family. Also consider who the guardian should be, and whether this person will also be a trustee.
Provide for your child’s education
Make sure you have sufficient life cover to provide for your child’s education. If your current life cover is not sufficient to cover their educational costs, Liberty’s Lifestyle Protector EduCator benefit is the ideal product to meet this need as it is designed to meet the cost of the child’s tuition and other educational expenses. It pays directly to the educational institution, which guarantees that the funds will be used for the purpose they were intended. In addition to school fees, it also pays for tertiary education, both domestically and at certain approved international institutions. Provision is also made for the payment of a supplementary allowance and an achievement allowance.
Kick start their DECLUTTER AND SAVE
By opening a Tax-Free Savings Account in your child’s name you can start to contribute monthly so by the time they start working they have a significant tax-free investment they can continue to contribute towards in order to build up their own legacy. The real benefit of the tax-free savings vehicles is felt over the longer-term when the tax savings become significant.
A living trust (inter vivos trust), may be an appropriate option if you have assets that should remain in the family for successive generations and which are growth assets. For example, the holiday cottage at the coast, or the game farm or the commercial building that is generating rental income.
Consider your options carefully
A trust should be established to protect wealth for future generations, and further to ensure that wealth grows and does not diminish. The decision to transfer assets into a living trust is not one that should be taken lightly. Once you have committed yourself to the trust it can be a costly affair to extricate yourself. There is currently also a great deal of uncertainty around the taxation of inter vivos trusts. Despite the uncertainty, if you have an asset that you feel should be retained in the family for generations to come, and should thus be protected from poor decision making by your beneficiaries, even if an expensive vehicle when it comes to tax, an inter vivos trust is the correct vehicle.
Many grandparents wish to leave an inheritance in order to educate their grandchildren. Not only does this provide for the grandchild’s education, but it also lifts the financial pressure off the parents. It is essential that this bequest is safeguarded against the risk of the unknown such as insolvency or bad debt incurred by the parents, divorce, or poor investment decisions. A bequest to a testamentary trust set for the purposes of the children’s education could provide the solution. It is also a tax-efficient solution as a testamentary trust established for minors enjoys the benefit of being favourably taxed as a natural person as opposed to the flat rates applied to inter vivos trusts.
Life insurance is a great vehicle for making a bequest, as it pays from a source outside of your estate, which can make things less complicated. You could consider using the Liberty Beneficiary Trust Fund to safeguard the inheritance until the child is ‘grown up’. The Liberty Beneficiary Trust Fund is essentially an inter vivos trust that has been registered and has authorised trustees who will administer funds ear-marked for your specific beneficiary.
Do not rule from the grave
When leaving an inheritance you need to be sure to make your instructions as simple as possible, and to avoid the temptation to rule from the grave. Steer away from old-fashioned tools such as usufructs and fidei commissums; they are cumbersome to manage and control and can ultimately result in heartache for all. Rather use testamentary trusts to meet these needs as they are far more flexible. Also, try not to lock your beneficiaries into each other, for eternity. Leave the house to your wife and if possible cash from a life insurance policy to your children, instead of a usufruct over the house in favour of your spouse, with the children inheriting the ownership of the house. Think about your marital regime, what is your spouse entitled to by virtue of the way you are married? Make sure you have enough cash in your estate so that illiquid assets do not have to be sold. True market value is seldom, if ever, achieved in a forced sale situation.
Leaving a charitable legacy
You could also consider a bequest to a charitable trust. There are many registered Non Profit Organisations (NPOs) and Public Benefit Organisations (PBOs) that ask that as your lasting legacy you make a bequest to them. Not many ordinary people are in the position to do this without it being detrimental to their loved ones as not many have that much cash to go around.
Cede a life policy
One could, however, consider leaving the benefit from a life insurance policy to a PBO. This can be done by ceding a life policy to the PBO. The individual would then pay the amount owed on the premium each month to the PBO, which in turn would pay the premium on the policy.
The individual would then be able to claim those monthly contributions under donations to a PBO and receive a tax deduction. On death of the life-assured, the PBO will submit the claim and receive the benefit. While the proceeds will be deemed property in the deceased’s estate, the corresponding deduction will be allowed with the net effect of no duty being levied on the proceeds.