How can I set up a testamentary trust?

Setting up a testamentary or will trust provides peace of mind if you have minor children or someone with a special need who relies on you financially.

Minor children cannot inherit cash or movable assets directly in terms of South African law, so in the absence of a testamentary trust, those assets left to them will be placed in the Guardians Fund until they are 18. Minor children also cannot sell or take a loan against property they have inherited.

If you are caring for someone who is physically or mentally unable to manage their own affairs, such as a special needs child, a testamentary trust can ensure that their financial needs are taken care of after your death.

A testamentary trust gives you more control over how and when your assets are distributed to your beneficiaries, and it protects these assets from creditors.

Where and how are testamentary trusts established?

Your will must specify that a testamentary trust is to be established upon your death, and you must include the following information:

The purpose of the trust

The names and ID numbers of the beneficiaries

The names and ID numbers of the trustees you have nominated, unless it’s a trust company

The assets to be placed in the trust

The duties and powers of the trustees

How income and capital are to be distributed to the beneficiaries

Any other special conditions, such as the trust’s termination date

Your will serves as the trust deed on your death, so it’s critical to have it professionally drafted, with as much detail as possible, so that no crucial issues are overlooked.

What are the costs?

Testamentary trusts are fairly expensive to manage, given the tax and regulatory environment in which they operate. Most trust companies charge a percentage of the assets under management in the trust, and there will also be administration and compliance costs. These depend on the size and complexity of the trust. 

It is very important to ensure there is sufficient liquidity in your estate and trust to cover these costs.

How are these trusts taxed?

A testamentary trust must be registered with the South African Revenue Service (SARS) as a special trust as defined in the Income Tax Act.

There are two types of special trusts with slightly different tax implications:

• Type A is a special trust for beneficiaries who are disabled or unable to carry out everyday tasks. They must have had their ailment for at least 12 months, and it must be permanent and irreversible.
  
  
• Type B is a special trust for minors. If you set up a testamentary trust for more than one child, the trust will qualify as a special trust as long as the youngest beneficiary is under the age of 18 on your death.

Special trusts are taxed at the same rate as individual taxpayers. However, Type B trusts do not enjoy the annual capital gains tax exclusion afforded to individual taxpayers.

Can a testamentary trust be changed?

As a general rule, the terms of a testamentary trust are drawn up in the will of the trust’s founder and cannot be changed after the testator had died.

However, the Trust Property Control Act provides for a court to amend a trust deed if the founder had never contemplated situations where the objectives of the trust are hampered, or if the terms are in contradiction with public interest or are not in the beneficiaries’ best interests.

When does a trust terminate?

You can specify when the trust should terminate in your will. A Type A trust usually terminates at the start of the tax year after the last beneficiary dies, and a Type B trust ends when the youngest child turns 18.

A testamentary trust can continue beyond this point, for example, until the youngest child is 21, 24, or any age you choose, but it will no longer enjoy the tax benefits offered by a special trust. From the tax year following the death of the last beneficiary for a Type A trust and after the youngest beneficiary of a Type B trust reaches the age of 18, these trusts are taxed in the same manner as all other trusts.

This article was written by Sylvia Walker, freelancer writer, financial planner and author. The article was reviewed by Harry Joffe, head of Legal Services for Discovery Life and Discovery Life International.