You are a guardian of someone
You have just recovered from the shock of your brother’s and sister-in-law’s accidental death, and you have just realised that you have been appointed (via your brother’s will) as a guardian to your deceased brother’s 3 young children. At the same time, you receive significant life insurance proceeds from your brother’s estate meant for the 3 children under your care. What do you do to ensure that you exercise your duty as guardian responsibly?
As a guardian, you have 2 important responsibilities. Firstly, you are responsible for the spiritual and physical well-being of the children under your care until they reach adulthood or parenthood. Secondly, you are responsible for the management of the money meant for the children. It is also your duty to oversee the proper succession of the money if you die before your duty as guardian ends. Both responsibilities are equally important and both are interlinked.
Estate Planning Implications and Problems
- The money meant for the children under your care is not your money.
- Issues of managing the assets. The money meant for the children has different objectives, time horizons, and risk profiles compared to your own personal money.
- Lack of communication. This can happen if you place the money in a bank deposit or financial product under your name without communicating this information to anyone. When you die pre-maturely, your spouse might think that the money is yours, leading her to assume that she has the right to inherit it.
- Your will does not communicate the existence of this money.
- If you do not segregate the money, it will be exposed to your personal liability risks. For example, this might happen if you place the money in a bank as a deposit and at the same time maintain a mortgage from the same bank. If you cannot fulfill your mortgage obligations, the bank will net-off the deposit from your liabilities.
Estate Planning Solutions
- Segregate and ring-fence the money if possible. This will reduce the temptation to use the money for your own benefit as well as prevent the money from being diluted by your personal liabilities.
- Set up a formal trust if the amount of money is significant.
- Manage the money with its own objective, time horizon and risk profile.
- Communicate in writing that this money is for the children. This is very important.
- Update your will to include instructions on what to do with this money if you die without having completed your role as a guardian. This should be done from day one when you take on the responsibility of guardian.
- It will be a huge remiss if you take on the responsibility of guardian without doing your own estate planning. The intestacy laws will cause the money to flow to the wrong person.