If you have a child with special needs, whether in the form of a mental or physical disability which prevents them from managing their own affairs, making provision for their financial future is likely to be an imperative. Those with special needs can be particularly vulnerable to being taken advantage of and, as such, putting mechanisms in place to administer the affairs of a special needs child is vital. In this article, we provide guidance to those with physically or mentally disabled children on setting up a special trust so as to protect their interests.
If you’re considering setting up such a trust (also known as a type A trust), it’s important to first determine whether your child’s disability meets the qualification criteria. A special trust of this nature must be set up in terms of Section 6B(1) of the Income Tax Act and must be registered with SARS in order to qualify for the associated tax dispensation. In terms of the Act, a disability is defined as a ‘moderate to severe limitation of any person’s ability to function or perform daily activities as a result of a physical, sensory, communication, intellectual or mental impairment’. As defined by the Mental Health Act, a mental illness is defined as a ‘positive diagnosis of a mental health-related illness in terms of accepted diagnostic criteria made by a mental health care practitioner’. Further to this, note that in order to qualify, your child must have been suffering from the disability for a period of at least 12 months and the condition must be considered permanent in nature – proof of which will need to be provided by the submission of medical reports from your child’s registered medical practitioners.
As an aside, it is important to note that this type of trust can only be set up for the benefit of a disabled person and no one else’s benefit. Where there are two or more beneficiaries to your trust, all must meet the qualifying criteria for disability and must be related to each other within the third degree of consanguinity*. If your trust deed makes provision for a beneficiary who does not qualify as mentally or physically disabled, the trust will not qualify as a type A trust. Assuming that the trust qualifies as a special trust, it will be taxed as a natural person at rates ranging from 18% to 45% trusts. In addition, the annual CGT exclusion of R40 000 is available to this type of trust, as well as the primary residence exclusion of R2 million of the capital gain on disposal for CGT purposes.
A special trust can take the form of a living trust registered during your lifetime or a testamentary trust set up in terms of your will and which comes into existence upon your death. Your personal circumstances and that of your special needs child will largely determine the type of trust most appropriate for your needs, although it remains important to understand the difference between a living and testamentary trust from an overall estate planning perspective, bearing in mind that the nature re of a living trust requires that you, as the trust founder, relinquishes control of the trust assets. You’ll also need to consider whether a vested or discretionary trust would be better suited to your needs. If setting up a vested trust, your child will have a vested right to the trust assets which may not be ideal. On the other hand, a discretionary trust means that the trustees have discretion as to how your child will be paid and how the assets will be dealt with. This may be a more appropriate form of trust because, as your child’s condition changes or deteriorates over time, your trustees will be able to adjust the management of the trust assets in line with your child’s needs.
The method of forming the trust will depend on whether you are setting up a testamentary or inter vivos trust. If setting up a testamentary trust, your will is your trust instrument, and the executor of your estate will be responsible for setting up your trust postmortem. To register a special trust for income tax and CGT purposes, the trustees must complete an IT777TR form which must be attached to either the trust deed or the will (in the case of a testamentary trust). Given that there are strict requirements for qualifying as a type A trust, bear in mind that the trustees will need to submit medical reports confirming the disability and attesting to the beneficiary’s inability to manage their affairs.
The trustees of your special trust have a fiduciary duty to manage the trust assets in the best interest of your special needs child and it is essential to select your trustees carefully. Avoid appointing too many trustees as this can cause logistical problems when it comes to convening meetings, attending to matters in person, and obtaining signatures. If setting up an inter vivos trust, you may want to consider appointing yourself as trustee together with two other trusted people – ideally one of whom is independent. In the case of a testamentary trust, note that while you can appoint your child’s guardian as trustee, it is advisable to include one or two other trustees to provide additional checks and balances.
Generally speaking, a special trust type A ceases to exist from the beginning of the year of assessment in which the last beneficiary dies, although this is not always the case. The trust deed can make provision for the trust to continue after the death of the last-dying disabled beneficiary, although in such a case it will no longer qualify as a Type-A trust and will be taxed as a normal trust.
As is evident from the above, navigating trusts can be tricky to navigate alone and it’s advisable to seek advice from a fiduciary expert when setting up your trust. Remember, your trust deed can only be amended by court so it’s important to get it drafted correctly upfront. A fiduciary expert can help ensure that the trust deed makes appropriate provisions in respect of the trustees’ duties and obligations, how the assets should be managed, the auditing of the trust, dispute resolution and details as to how you would like your child to be cared for when you are no longer around.
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*The degree of relationship between two people is determined by counting the number of steps to a common ancestor.