Estate Planning Hack: Unlocking the Power of Beneficiary Funds

“Piglet noticed that even though he had a Very Small Heart, it could hold a rather large amount of Gratitude.” (Winnie the Pooh, by A.A. Milne)

The tax-free launchpad for young futures

With a bit of planning, retirement fund members can ensure that, in the case of their own death, their minor children benefit from a tax-free financial vehicle. Imagine:

No entry tax for payouts up to R500,000
No tax on income or capital gains
No tax when the child turns 18 and receives what remains

Even better, an 18-year-old can choose to keep the money in the fund, continuing to enjoy its tax benefits. It’s like getting a financial head start, with no strings attached from SARS.

What is a beneficiary fund?

Introduced in 2009 under the Pension Funds Act, beneficiary funds are legally defined pension structures designed to manage and protect death benefits for minors. You need to make provision for them in your will, and they only kick in if the fund member dies. Because they’re governed by the same strict standards as retirement funds, your child’s money isn’t just invested wisely – it’s also safeguarded.

Big picture strategy

These funds aren’t just piggy banks. They are comprehensive financial planning tools. They pay monthly amounts to guardians for everyday expenses, offer larger distributions for education, healthcare, and other essential needs, and utilise tailored investment strategies to stretch the funds through childhood. Think of it as a personal wealth manager for your child.

After your death, the trustees of the retirement fund must decide how to manage the child’s portion. The options?

Lump sum to the guardian. Risky. There’s no oversight, and the funds may not last.
Leave it in the retirement fund. Not ideal. These funds are built for accumulation, not withdrawals.
Transfer to a beneficiary fund. The winner. It’s designed for structured payouts, with built-in governance and tax benefits.

Beneficiary funds create a safety net, allowing the guardian to be involved in budgeting but not giving them access to capital without trustee approval.

Why not just give the guardian the money?

Two words: “tax” and “temptation”. Payouts to guardians can be taxed and aren’t guaranteed to be used in the child’s best interests. Even well-meaning families can feel financial pressure, and as a result, money might be redirected away from a child’s education or healthcare. Beneficiary funds are ring-fenced in the child’s name, and trustees must approve any significant disbursements. It’s like locking up the cookie jar until it’s snack time.

Beneficiary funds vs. standalone trusts

Beneficiary Funds (also known as umbrella trusts) provide faster access to funds than standalone trusts. What’s more, no trust deed or court registration is required. They offer lower costs and expenses are shared across many beneficiaries.
Standalone trusts, on the other hand, entail drafting and registering a deed, appointing trustees, and managing governance, accounting, and investments. Unless there’s a specific legacy or a complex need, beneficiary funds often provide all the benefits without the red tape.

A smarter estate plan starts here

It’s time to shine a light on this underused yet highly effective solution. By understanding beneficiary funds and updating their nomination forms, parents can unlock tax efficiency and asset protection for their children.

When it comes to looking after the next generation, why not do it the smart way? For further information on beneficiary funds, please contact us.

Jason Yutar: +27 83 415 9603 or
Zaheera Mohammed: +27 82 775 1898

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.

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