Umbrella trusts, beneficiary funds can help with the care of elderly dependants

South Africa’s “sandwich generation” is under growing pressure. Many middle-aged adults are supporting their own children while simultaneously caring for ageing parents – often parents living with dementia or other cognitive illnesses.

Balancing these responsibilities can be emotionally and financially overwhelming. Adult children must juggle careers, childcare and the complex needs of elderly relatives who may no longer be able to manage their own finances or daily affairs.
 

A rise in mental conditions among the elderly

Advances in medical treatment have had an impact on our physical longevity; however there is growing evidence that the mental capabilities of the elderly may not be doing as well. Dementia, Alzheimer’s and numerous other mental conditions appear to be on the rise.

The research bears this out. It is estimated that 36 million people were living with dementia worldwide in 2010, and that this number will increase to 66 million by 2030 and 115 million by 2050 (2012 World Alzheimer Report). Low- and middle-income countries are the source of nearly two thirds of these statistics, with the sharpest increases in numbers set to occur there as elderly populations grow.

Individuals experiencing cognitive decline often lose the ability to manage bank accounts, investments or everyday financial decisions. Adult children therefore frequently step in to manage responsibilities such as overseeing bank accounts and investments, coordinating caregivers, arranging medical treatment, paying for assisted living or frail-care facilities, and ensuring day-to-day living expenses are covered.

For the sandwich generation, this administrative burden can be almost as demanding as the emotional responsibility of caregiving.

Compounding the problem, migration and emigration have increased significantly in recent decades, with many South Africans moving to major cities or abroad in search of employment opportunities, education or safety.

When dementia develops, the physical distance between family members can complicate both caregiving and financial management. Families may find themselves trying to organise medical care, manage finances and coordinate support for elderly relatives from hundreds - or even thousands - of kilometres away.
 

Two financial vehicles as a solution

In this environment, financial structures such as umbrella trusts and beneficiary funds are becoming increasingly important tools to help families manage the financial needs of elderly dependants who have lost financial independence. Importantly, these structures are administered in a similar way, providing professional oversight and structured financial support for vulnerable beneficiaries.

Professional administrators then manage the capital and ensure that payments are made in the best interests of the dependant.

Payments can be structured to cover essential expenses such as accommodation in frail-care facilities, caregiver services, medical treatment and medication and everyday living costs. In some cases, umbrella trusts and beneficiary funds can even pay service providers such as nursing homes directly, ensuring that the funds are used appropriately.

Definitions

Many people – families, financial advisers and retirement fund trustees alike - are not aware of these two vehicles which are administered in exactly the same way. The major difference between them being that umbrella trusts are regulated by the Trust Property Control Act and beneficiary funds by the Pension Funds Act.

Umbrella trusts offer a cost-effective alternative to a stand-alone trust, in particular for amounts less than R2 million. They are a practical way to safeguard assets and keep things running smoothly. Advantages include: no need to register a new trust deed, professional governance, cost efficiencies through scale, regulatory oversight, and the comfort that funds are managed independently of family dynamics at a time when emotions often run high.

Beneficiary funds are not new, having been introduced in 2009. They are run on exactly the same lines as an umbrella trust but are set up to receive employment-related death benefits at the discretion of retirement fund trustees acting in terms of Section 37C of the Pension Funds Act. Traditionally, beneficiary funds were designed to house death benefits for minor children of deceased retirement fund members. However, the same structure can be equally effective for elderly dependants.

How to go about it

For an umbrella trust, a settlement agreement (or deed of settlement) is used.

This document typically specifies:

The amount settled into the trust

The beneficiary or beneficiaries

The age or condition under which benefits vest (for example, at age 18 or on completion of studies)

Rules for distributing benefits for maintenance, education, etc.

For beneficiary funds, retirement fund members need to guide the trustees using their beneficiary nomination form to indicate they would like a beneficiary fund to be used for the care of elderly financial dependants. Read more: What is a beneficiary fund?

Conclusion

Financial planners, retirement fund trustees and the public alike need to acquaint themselves with these two important vehicles, which have many uses, and incorporate them into modern estate planning.