Planning for those with mental or physical disabilities

If you have children, relatives or even a spouse with any form of mental or physical disability, providing for them financially when you are no longer around may be a source of concern to you. Thankfully, our legislation makes provision for special trusts which are excellent planning tools when it comes to providing for those with disabilities.

Using a special trust Type A, whether in the form of an inter vivos trust or testamentary trust, the trust founder is able to provide financially for a relative who through mental or physical disability cannot provide for themselves, while at the same time enjoying preferential tax treatment to ordinary trusts. Whether you choose to set up an inter vivos or testamentary trust depends on your personal circumstances and those of the beneficiary you wish to take care of. For instance, if you have a mentally disabled child who you would like to make provision for in the event of your death, it may make financial sense to set up a testamentary trust which will then only come into formation after your passing. On the other hand, if you have recently diagnosed as being in the early stages of dementia, but at present have full mental capacity, you may want to consider setting up an inter vivos trust in which to transfer your assets for the sole purpose of providing for your financial needs as the disease progresses.

Special trusts Type A must be set up in terms of Section 6B (1) of the Income Tax Act in order to qualify for the special tax dispensation that such trusts enjoy. However, there is a strict set of qualifying criteria that must be met before the trust is recognised as a special trust Type A. In the first instance, the trust must be created solely for the maintenance and care of a person with a mental illness as defined in the Mental Health Care Act, or a person with a physical disability which prevents him from managing his own affairs. 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 physical, sensory, communication, intellectual or mental impairment’. As such, the beneficiary as a result of his disability must be unable to earn sufficient income to provide for themselves and must be incapable of managing their own affairs.

It is important to note that the beneficiary’s disability must be formally diagnosed by a medical practitioner, must have lasted for a period of more than 12 months, and must be considered irreversible in nature. In addition, it is important that the trust is set up solely for the benefit of the beneficiary (or beneficiaries). This means that the trust deed cannot provide for any other beneficiary who does not meet the ‘disability’ definition stipulated by the Act, and the trustees may not benefit from the trust. Having said that, a special trust Type A can be set up to provide for more than one beneficiary who meets the ‘disability’ definition provided that they are related to each other, with the definition of who qualifies as a ‘relative’ being set out in Section 1 (1) of the Act.

To set up and register a special trust Type A for income tax and CGT purposes, the trustees must complete an IT77TR form which is then either attached to the inter vivos trust deed, or to the last will and testament in the case of a testamentary trust. Additional documentation required will include a medical report from the beneficiary’s medical practitioner which confirms the diagnosis and confirms that the disability of the beneficiary is such that he/she is rendered unable to provide for themselves. Once registered correctly, a special trust Type A will be taxed as a natural person on a sliding scale between 18% and 45%, unlike ordinary trusts which are taxed at 45%. In addition, the annual CGT exclusion of R40 000 is available to this trust, as well as the primary residence exclusion of R2 million of the capital gain on disposal for CGT purposes. As a disabled person, if you set up a special trust for you own benefit and transfer assets into the trust, you may in terms of a recent Sars ruling, be able to avoid paying donations tax (see Binding Private Ruling BPR 306).

Choosing the trustees for your special trust is of great importance as the care and well-being of the disabled beneficiary will lie in their hands. As such, it is advisable to appoint at least three trustees to the trust while ensuring that one of the trustees is wholly independent. Trusts are separate legal entities and the appointed trustees have a fiduciary responsibility to act in the best interest of the beneficiary and in accordance with the trust deed. To ensure that the assets left in trust are optimally administered, it is therefore further advisable to ensure that one of the trustees has sound financial and legal expertise. Appointing a family member who has a good understanding of the beneficiary’s disability and who understands how you would want him to be cared for when you are not around is also a good idea, bearing in mind that you are able to appoint a child’s guardian to the position of trustee. Beware of appointing too many trustees to your trust as this could result in impracticalities when it comes to co-ordinating meetings, getting signatures and making prompt decisions. Be sure that the trust deed sets out how you wish your beneficiary to be cared for when you are no longer around, is clear in terms of the discretion provided to the trustees, and makes provision for trustee succession. If it has been some time since your reviewed the testamentary trust provisions in your will, we recommend that you do so to ensure that the scope of the trust remains relevant to your beneficiary’s condition, bearing in mind that his condition may have deteriorated since first setting up the testamentary trust. Further, ensure that the trustees you have nominated in your will are still the people who would trust most to look after you beneficiary’s interests. In terms of the longevity of a special trust Type A, such an entity generally ceases to exist from the beginning of the year of assessment in which the last beneficiary dies.

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