Covid has orphaned many children. Here's how to protect their future

The COVID-19 pandemic’s second wave unleashed misery across the country, leaving behind lakhs of distraught families. According to NCPCR’s June 5 affidavit in the Supreme Court, over 3,500 children across the country have lost both their parents due to the deadly disease. In addition, nearly 26,000 kids have had to deal with the loss of at least one parent. These children now find themselves in vulnerable positions.  Last week, Moneycontrol’s two-part series focused on how friends and family can take guardianship of Covid-19 orphaned children. And then, how to secure a Covid-19 orphaned child based on what their parents would have left behind. In today’s story, we take a step back and tell you how to secure your own children’s financial future while you are still alive. The idea is that your children’s financial future doesn’t get compromised.

COVID-19 has reminded us that it’s important for parents to have an effective financial plan for safeguarding their kids’ future even in their absence. Investing in mutual funds through the systematic investment plan (SIP) mode with a long-term perspective or buying a large term insurance policy is not enough. You must make provisions to ensure that your wealth is passed on to your children even if you are not around to protect them.

Take for instance the case of eight-year-old Anjana Kapoor (name changed). Both her parents passed away due to COVID-19 in April. While they had created a Will that named her as the sole beneficiary of their investments, her father, in one of his bank accounts, had appointed his brother as the nominee. “The bank paid him the funds, which he utilised. Now, the grandparents are the child’s guardians are unable to access the money at the moment as he has refused to return the money,” says Jitendra Solanki, Founder, JS Financial Advisors.

Once financial institutions hand over the money to the nominees, their responsibilities stand discharged. “Only the nominee matters to financial institutions. It is up to the heirs to claim the amount from the nominees by following a lengthy legal process,” explains Solanki.

Get your nominations right

Step one in your financial plan for your children, therefore, is to appoint nominees carefully. It’s a simple task as you merely need to mention the names in the forms that you fill up while opening bank accounts, investing in mutual funds or buying an insurance policy. In life insurance, if you nominate the spouse, parents or children as nominees, they will be treated as beneficial nominees, and the proceeds will go to them, even if other legal heirs object.

“But you should also review the nominations every five years or at every life-stage,” he says. For instance, you must review all nominations – in your bank account, life insurance policies or mutual fund investments – once you get married, have children or retire. Also, ensure that your nominations are in line with your Will. “Where the nominee is different from the legal heir (or their guardians), there is scope for disputes. Such matters could end up in courts, which could take years to resolve. To ensure that your children do not have to face such challenges, your nominations should be in sync with your Will,” he adds.

Also read: 7 tasks to complete for settling money matters after the demise of a loved-one

Make a Will

As a more robust mechanism of making sure that your children inherit your investments, a Will can prevent disputes, unlike nominations. Solanki says that parents can also specify assets to be utilised or earmarked for any specific goals for their children.

If parents die without leaving behind a Will, the laws will determine who the guardian would be. This court-appointed guardian would then have control over your children’s affairs, subject to court orders. The problem is that the identified relative or family member may just not be interested. So, you must take the initiative of appointing a guardian. “If parents appoint a testamentary guardian (that is, appointed as per the Will) and the said Will is given effect under the applicable law, which is enough to confirm the appointment,” says Rishabh Shroff, Partner, Cyril Amarchand Mangaldas. You can also write a more complex, testamentary Will. “This takes the shape of a trust on the demise of the creators. It is irrevocable, and hence, as effective as a family trust,” advises Raghavendra Nath, Managing Director, Ladderup Wealth Management.

Also read: Will or trust? Here’s how you must choose the best way to transfer assets to your loved ones

Create a trust

Creating a private family trust can provide stronger financial protection to your children. “Think about about putting the property in a trust for the minor, in which case no such court permission is required, given that the property is under the ownership of the trustee (not a guardian),” advises Shroff.

A relatively lesser-known concept for many, establishing a trust is generally seen as an expensive framework better suited for affluent families. However, it has several advantages even over a simple Will, though it does not preclude a Will, and is costlier as it involves elaborate planning. How will this trust work? “A trust is living entity that has a legal identity separate from that of its creators (parents) and the beneficiaries (children). Once created, assets earmarked for your children will move into this trust,” says Nath. Unlike a regular or testamentary Will, it comes into effect during parents’ lifetime.

You can appoint trustees – family members, well-wishers and also professional financial institutions with expertise in wealth management – to manage your assets and execute your succession plan. “The trust deed can specify how the assets are to be managed and link them to individual goals too. It is flexible and your plans can be as elaborate as you want them to be,” adds Nath.

If structured well, succession planning could be a smoother affair compared to merely writing a Will. “It is a document that can be executed only in the case of the makers’ death. Also, with a Will, the assets could be controlled by guardians who are not savvy when it comes to managing financial affairs. A trust, on the other hand, can offer more professional management of your wealth,” he says.