Protecting your assets through a testamentary trust

A testamentary trust, also sometimes referred to as a Will trust, is a commonly used trust when it comes to estate planning. Unlike an inter-vivos trust which comes into existing during the lifetime of the trust founder, a testamentary trust only comes into existence on the death of the testator and can be effectively used to protect and preserve assets bequeathed to minor children, mentally or physically disabled beneficiaries or a surviving spouse.

A testamentary trust is created by including a trust clause your Will which in essence serves the same purpose as a trust deed. Bear in mind, however, that there are certain formalities which must be met in order for the trust to be created on your passing, so it is advisable to get an estate planning expert to assist you when drafting your Will. Specifically, your Will must contain clear evidence that you intend to create a trust, and it must further identify the property or assets which should be moved into the trust. You must also nominate who the beneficiaries of the trust should be so as to avoid any confusion. Because of the principles applicable to freedom of testation in South Africa, it is very difficult to contest the terms and conditions of a testamentary trust. Importantly, if your Will is found to be invalid for whatever reason, the trust will not come into effect and this can have unintended consequences for your beneficiaries and dependants.

Up until the age of 18, children in South Africa are considered to be minors and do not have legal capacity to enter into agreements or contracts without the assistance of a legal guardian. As such, a testamentary trust is an excellent way to protect the interests of your minor children after you have gone. It can also be used to make financial provision for your spouse or protect an asset such as a holiday home or farm which cannot be divided between your heirs. A testamentary trust can be used to preserve assets that may be squandered by a beneficiary or who may waste his inheritance.

By including a trust clause in your Will, you essentially provide the mechanism for the establishment of a testamentary trust upon your death. Your Will should also set out the terms and conditions that apply to the testamentary trust, nominate trustees, and provide guidance on how the trust assets should be managed for the benefit of the beneficiaries. In general, however, the terms of a testamentary trust are not as detailed as with an inter-vivos trust. If your Will provides for the formation of a testamentary trust for your minor children but at the date of death all your beneficiaries are over the age of 18, the provision will simply be ignored.

As the testator, you will effectively be the founder of the testamentary trust and nominating trustees to manage your trust is an important decision. The trustees have a fiduciary duty to manage the trust assets in the best interests of the beneficiaries and it is not a job to be taken lightly. It is essential to appoint trustees who you trust implicitly to protect the assets for the benefit of your heirs and in accordance with your wishes. It is advisable that they have a sound understanding of finance to ensure that your assets are properly controlled and manage, and that tax efficiency is achieved. You do not need to appoint your child’s legal guardian as a trustee and, in fact, it is sometimes better to have a separate person filling the role of trustee.

Upon your death, your appointed trustees must apply to the Master of the High Court for letters of authority which will allow them to set up and manage the trust as per your instructions. The duration of the testamentary trust will depend on the terms and conditions that you have included in your Will. For instance, you may choose for your trust to remain in existence until each beneficiary reaches age 25, after which the trust will terminate. In general, a testamentary trust will terminate once the nominated beneficiary reaches a certain age, after a pre-determined period of time, or on the death of the income beneficiary. A testamentary trust can own immoveable property, receive donations and inherit money from your estate when you die, and is a secure way of ensuring your assets are correctly managed by people you know and trust.

Examples of specific clauses in a Will setting out the responsibilities of the trustees include:

– To invest cash, the proceeds of assets realized and surplus income, for the benefit of the Trust, in any manner and to call up and reinvest such investments, as the Trustees may deem fit in his sole discretion, without being restricted to recognised Trustees investments.

– To, at his sole discretion, provide out of the Trust income for the maintenance, education and general benefit of the beneficiaries concerned and for all expenses, obligations and costs in relation to the Trust assets and any business ventures which may be conducted and also for necessary and useful improvements, interest and capital repayments and outstanding loans, payment of debts and income- and other taxes and, if the income is insufficient, to pay the shortfall from capital and to capitalize any income not utilized for the above-mentioned purposes for the benefit of the beneficiaries concerned.

A testamentary trust can qualify as a special trust as long as the youngest of the beneficiaries is under the age of 18 on the last day of the relevant year of assessment. In such a case, the testamentary trust can be registered as a special trust type B. A testamentary trust for the benefit of physically or mentally disabled children can also qualify as a special trust and would be registered as a special trust type B. The rate of income tax applicable to special trusts is the same as for natural persons on a sliding scale relevant to the income brackets, but such a trust must be set up in terms of the Income Tax Act in order to qualify for this favourable tax rate.

If you have minor children, not making provision for a testamentary trust can lead to problems and unintended consequences after your death. Firstly, in the absence of a testamentary trust, any assets bequeathed to your minor child will be held by the Guardian’s Fund which falls under the administration of the Master of the High Court. These funds are generally invested at below-market interest rates which makes it difficult to ensure adequate capital growth of the assets. Because assets housed in the Guardian’s Fund are effectively managed by the state, many guardians struggle with red tape and find it difficult to get these funds released timeously for the adequate care of the minor child. In terms of legislation, the Master of the High Court can pay out all interest to the minor child, although this interest is only paid annually; and an overall maximum of R250 000 that can be drawn from the fund until the minor reaches age 18. This means that, if the interest is not sufficient to provide for the needs of the minor child, the guardian is not able to claim more than R250 000 from the fund. Also important to consider is that only money can be transferred to the Guardian’s Fund. In the case of immoveable property bequeathed to a minor child, the property must be registered in the name of the minor and managed by the legal guardian until the child reaches age 18.

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