Special trusts serve as valuable estate planning tools designed to safeguard assets intended for minor children or beneficiaries with special needs. Whether established during the founder’s lifetime or upon their passing, these trusts ensure that vulnerable individuals receive financial security while benefiting from potential tax advantages. Understanding the different types of special trusts and their implications can help you make informed decisions about securing your loved ones’ futures.
What is a trust?
A trust is a legal entity created to hold and manage assets on behalf of beneficiaries, such as minor children or individuals with special needs. Assets can be transferred into a trust through sale, donation, or inheritance as stipulated in a Will. In South Africa, trusts are governed by the Trust Property Control Act (1988) and incorporate elements of English, Roman-Dutch, and South African law. Although not a juristic person, a trust can, in certain circumstances, be regarded as a separate legal entity, particularly for tax purposes under the Income Tax Act.
How is a trust formed?
A trust is established by a founder using a trust instrument:
- If the founder creates the trust during their lifetime, it is known as an inter vivos (living) trust, formalised through a trust deed.
- If the trust is intended to be formed after the founder’s passing, it is known as a testamentary trust, created through a Will.
The trust instrument must specify:
- The objectives and purpose of the trust.
- The names of the beneficiaries.
- The powers, rights, and responsibilities of the trustees.
- The conditions for termination of the trust.
What are special trusts?
A special trust is a specific type of trust designed to protect the financial interests of vulnerable beneficiaries. In South Africa, special trusts fall into two categories:
- Special Trust Type A: Established for beneficiaries with a permanent mental or physical disability.
- Special Trust Type B: Created to manage assets for minor children under the age of 18.
Both types of trusts provide estate planning benefits, but their tax treatment differs.
Special Trust Type A: Financial protection for beneficiaries with disabilities
Purpose of a Type A Trust
A Type A trust is designed to provide financial security for a person with a severe mental or physical disability who is unable to support themselves financially. It can be either an inter vivos trust that is set up during the founder’s lifetime, or a testamentary trust that is created upon the founder’s death through their Will. This type of trust ensures that assets are protected and used exclusively for the benefit of the disabled beneficiary, shielding them from potential financial abuse or mismanagement.
Who qualifies as a beneficiary?
To be eligible for a Type A trust, the following must apply:
- The beneficiary must have a severe mental, physical, communicative, intellectual, or sensory impairment.
- The disabled beneficiary must have been diagnosed by a registered medical practitioner.
- The disability must be of a permanent and irreversible nature and must have persisted for at least 12 months.
- The trust must have been set up for the sole benefit of the disabled beneficiary.
- If there is more than one disabled beneficiary nominated, they must be related to each other.
Tax Benefits of a Type A Trust
A Type A trust is treated more favourably than ordinary trusts for tax purposes, although in order to qualify, it must be registered with SARS as a Special Trust Type A. The tax benefits include:
- Instead of paying the flat trust income tax rate of 45%, it benefits from the individual tax rate (18%–45%).
- It qualifies for a R40,000 annual Capital Gains Tax (CGT) exemption.
- It enjoys a R2 million primary residence CGT exclusion when selling a property.
Governance and Termination
A minimum of three trustees, including one independent trustee, should oversee the trust. The trust generally ceases to exist at the start of the tax year following the death of the last remaining beneficiary.
Special Trust Type B: Protecting inheritances for minor children
Purpose of a Type B Trust
A Type B trust is set up to hold assets for minor children or relatives who are under 18 at the time of the founder’s death. It prevents the children’s inheritance from being placed under the administration of the Guardian’s Fund, which is managed by the Master of the High Court. Unlike a Type A trust, a Type B trust can only be created through a Will and comes into effect upon the founder’s passing.
Tax Treatment of a Type B Trust
While a Type B trust benefits from individual income tax rates (18%–45%), it does not receive the same Capital Gains Tax (CGT) exemptions as a Type A trust.
Termination of a Type B Trust
A testamentary trust typically ends when:
- The youngest beneficiary reaches a specified age (e.g., 21 or 25).
- A predetermined event occurs, such as the death of an income beneficiary.
- The youngest beneficiary turns 18, at which point the trust ceases to qualify as a Special Trust Type B.
Key considerations when setting up a special trust
The importance of a well-drafted trust instrument: A special trust must be carefully structured to align with the founder’s objectives and ensure the best interests of the beneficiaries. The wording of the trust deed or Will is crucial in determining how assets will be managed and distributed.
Selecting trustees: Trustees play a critical role in managing and protecting trust assets. Ideally, a trust should have at least three trustees, including an independent trustee to ensure accountability.
Legal and tax compliance: Since trusts are subject to complex tax and legal regulations, working with a trust specialist or financial planner is highly advisable. They can help ensure that the trust:
- Meets legal requirements.
- Takes full advantage of available tax benefits.
- Is structured to serve the long-term needs of the beneficiary.
Special trusts provide an essential financial safety net for minor children and individuals with special needs, ensuring that their assets are protected and properly managed. Whether you’re a parent of a special needs child or want to safeguard an inheritance for your minor children, setting up a well-structured special trust can provide peace of mind and long-term security.
Have a great day!
Sue
