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Estates and Wills
Saturday, September 1, 2007
Advice on strategy

An umbrella trust is created to protect children’s benefits, which is linked to a pension, provident or preservation fund, a retirement annuity or a group life insurance scheme. Recent incidents where widows and orphans have been left penniless following the mismanagement of funds in an umbrella trust have come under the spotlight.

Berrie Botha, Chief Executive of Sanlam Trust, says that according to the Pension Funds Act, when a member of a fund dies the trustees of that fund must ensure the benefits are “fairly and equitably” allocated to the beneficiaries. In the event of those benefits being allocated to minors, the trustees are expected to take their best interests into account as to:
• Whether the benefits should be paid to the guardian;
• How the benefits should be paid, for example, monthly or quarterly; and,
• Whether it is best for the benefits be paid into a trust and managed on behalf of the minor until he/she reaches an independent age.

Unlike other trusts where a deed needs to be set up for each child, an umbrella trust can save on costs because it provides for one trust deed for all the beneficiaries of the fund. Individual trust accounts are, however, opened for each child.
The trustees of the fund will notify a trust company in writing of their decision to create an umbrella trust. The company will then draw up a trust deed and present it to the trustees for approval and signing, which is then registered with the Master of the High Court.
After a member of a fund dies the trustees have to decide if the benefits allocated to minors must be paid into a trust. If so, they would need to complete a trust information form, which should clearly illustrate how the benefits need to be paid out and managed. This form, along with details of the benefits, then has to be passed on to the trust company. The trustees of the fund also need to instruct the administrators of the fund to pay the money into the newly established trust.
“If managed by a reliable trust company, an umbrella trust can be used to protect your loved ones’ allocated benefits,” says Mr Botha. “For example, what happens if the parent who is left behind to take care of the children is suddenly unable to carry out his or her necessary duties? In the case of remarriage what if the new partner fails to form a much-needed bond with the children? In this instance, an umbrella trust is particularly suited as it will keep the children’s money safe and the benefits protected.
“You can save on the cost of registering individual trusts for each beneficiary,” he adds. “And if planned carefully, umbrella trusts can offer several tax savings.”
According to the needs of each individual, monthly maintenance can be paid to the surviving parent or guardian for taking care of the minor dependants. Financial provision can also be made for the education, medical care and general well being of dependants. Any ad hoc requests such as payments to schools or doctors that are submitted in writing and accompanied by the necessary proof are paid directly to the service provider to prevent fraud.
Once the trust is terminated (in accordance with the trust deed), the balance of the capital, together with any accumulated income, should be paid into the beneficiary’s account.
Mr Botha observes that the trust deed must be carefully studied and should provide a clear understanding of what the trustees’ duties and powers entail. The trust deed should include details of:
The application of income and capital
• Audits
• Security
• Remuneration of the trustees
• Indemnification of the trustees
• Termination of the trust.
The service-level agreement provides clarity on the responsibilities of the administrator’s services, their procedures, delivery times, conditions of termination, confidentiality and indemnity. It is also advisable to ensure that the trust deed or service-level agreement does not include a lock-in clause, which stipulates, “that at the termination of the agreement, trust assets cannot be transferred to another trust or administrator.
The directors of the trust company should not be the trustees of the trust.
By law, a trust company should always undergo regular internal and external audits. Ascertain whether the company has sufficient internal quality and control procedures in place. “It is also important to bear in mind that trusts are not obliged to submit financial statements to the authorities,” he notes, “and it is therefore necessary to check that regular audits are being conducted.”
Request the details of the trust company’s financial statements for the past five years and seek the advice of a qualified financial auditor to assist with understanding the company’s financial position.
Make sure the trust company makes use of different investment service providers with a sound strategy and policy in place. For example, does the trust company invest all the money of an umbrella trust into its own investment solutions? No trust is bound to use one specific investment service provider. In other words, trust companies or trustees should only invest in the best available options that are in the best interests of the dependants.

Copyright © Insurance Times and Investments® Vol:20.8 1st September, 2007
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