Losing a parent – and a sense of security – is a traumatic experience for any child. Sadly, this painful process is often exacerbated when proper planning is not in place to ensure your children will still enjoy financial security, even if you are no longer here to provide for them.
Proper financial planning is crucial to ensure your children is financially provided for if you die, especially for minor children, children with single parents, children from a previous marriage and handicapped children.
Hein Klokow of Secure Legacy outlines a three-step process to ensure your children’s financial future is secure when you are no longer around.
“A common concern, particularly with minor children, is how to determine and provide a sufficient income for them after the death of one or both parents,” explains Klokow.
“A further concern is how this income, as well as any assets, will be managed and preserved to ensure the children have the financial resources they need until the time they become adults. We recommend a three-step process to address these concerns, and the expertise of an experienced estate planner who understands the different estate planning structures and can assist you to consider all the relevant factors applicable to your situation.”
1. Determine your children’s financial needs
Firstly, with the help of your estate planner, you need to determine your children’s financial needs. Every family is different with its own circumstances.
In addition, the considerations for parents with minor children are different from those with adult children. There are also additional considerations when you have a handicapped child or children from a previous marriage.
2. Providing the financial resources
Once you have established what your children’s financial needs are in the case of death of a parent, you need to ensure that the financial resources are in place to meet those needs.
The most common way to ensure that there is sufficient income for your minor children is to utilise family assets and life insurance policies.
3. Sustainable management
Once the financial resources are in place, a structure is required to manage it sustainably to ensure it will continue to provide for your children’s financial needs until the time they become adults.
Normally, in the case where one spouse dies, the other spouse inherits the estate assets and is also the beneficiary on the life policies. He or she then uses the life insurance claim payments and assets to cater for the financial needs of the children.
There are, however, often cases where you will have to consider alternatives, especially if you are a single parent, if your spouse is unable to manage the financial affairs or if you have a child from a previous marriage. Similarly, adult children who are not capable of managing their financial affairs can, with the right structure, be allowed to benefit from their inheritance without having to make financial decisions.
“In these cases, and in the eventuality of both parents dying, we generally make use of one or more trusts. The trust deed stipulates how you wish the funds to be utilised, who the trustees will be and when the trust should terminate so the assets pass to your children as they reach adulthood – usually at age 18, 21 or 25 or, in the case of a handicapped child, until death,” explains Klokow.
“The trustees have the responsibility to manage and invest trust funds as well as to adhere to your direction for your children’s health care, education and maintenance as set out in the trust deed. It is thus very important to choose your trustees carefully! You should consider appointing an independent trustee, who deals with the administration of trusts on a day-to-day basis, together with a trusted family member or friend, both of whom will work closely with your children’s guardian. This should provide structure, compliance and independence to the trust, ensuring your children’s inheritance is managed in their best interest.”
A further consideration will be the type of trust and the tax implications of each option. Your estate planner will be able to assist you in weighing up the advantages and disadvantages of different estate planning structures, considering all the relevant factors applicable to your family’s specific circumstances.
With expert advice and proper planning, you can ensure that your children will be provided for financially when you are no longer around to take care of them – a lasting gift that will continue to provide financial security long after you have gone.
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