29th of June 2010
Death Benefits Distribution
Death Benefits Distribution
There are new challenges facing trustees.
A more appropriate and sound way of ensuring that lump sum benefits owed to the minor children of a deceased member of a retirement fund, are properly managed has become necessary, as the number of orphans and child headed households spirals. Caregivers, be they family, friends or strangers need to have access to the death benefits so that they are not financially burdened. But the possibility of a benevolent caregiver siphoning off minors’ inheritance leaving them destitute is not hard to imagine.
Rather the fraudulent use of death benefits it is a very real concern that has been dealt with by the introduction of the Financial Services Laws General Amendment Act early this year, says Carlyle Field of Shepstone & Wylie. A major change to the law is that the payment of a retirement fund lump sum death benefit may no longer be paid to a trustee or trust unless specifically nominated by the member or the person to whom the payment would otherwise be made.
If the beneficiary is a minor (under 18) it must be paid to a legal guardian or caregiver, a beneficiary fund registered in terms of the Pension Funds Act; or a trustee or trust if specifically nominated by the member, legal guardian or caregiver. The recognition that a caregiver should be able to receive the death benefit to meet the daily needs of a minor beneficiary is new and strict principles have been laid out to ensure the best possible outcome.
The higher the death benefit value the more onerous the retirement fund trustees’ duty to ensure that measures are put in place to properly administer the money paid directly to the caregiver. The caregiver’s ability and qualifications to manage the financial affairs of the beneficiary must be considered. Important factors include level of education, financial literacy, and ability to manage their own financial affairs, occupation, income, financial independence, credit record and worthiness as well as assets acquired.
The health of the caregiver is also important. If the caregiver is terminally ill and likely to die shortly after the allocation is made, the benefit should rather be placed in a beneficiary fund. This would avoid the death benefit payment falling into the caregiver’s deceased estate and being distributed to the caregiver's heirs, which may not include the minor child. While it is also recognised that higher returns could be earned if the caregiver invested the death benefit, Trustees have to consider the responsibility and experience of the guardian in selecting and maintaining such an investment.
If the minor beneficiary is very young there may be a need to protect a small portion of a large benefit for future needs such a primary, secondary and even tertiary education fees, while the bigger portion of the benefit could be awarded to the caregiver for meeting the daily needs of the minor. However, Trustees have to balance this with the fact that a guardian has a common-law right to administer monies on behalf of the minor, and should only be deprived of this right when a Trustee investigation clearly shows that the caregiver is neither qualified nor competent to do so.
As the decision regarding the method of paying a death benefit can be challenged in court or the Office of the Pension Funds Adjudicator, it is important for the Trustees to keep a written record of the deliberations and investigation which lead to their decision.
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