Special trusts can be effective estate planning tools for the safe custody of assets intended for minor children or beneficiaries with special needs. Whether set up as an inter vivos or testamentary trust depends on the intention of the trust founder and the circumstances of beneficiaries whose assets he seeks to protect.
What are trusts?
A trust is a legal entity which is created to hold assets for the benefit of certain persons, such as your minor children or children with special needs. Assets can be transferred into a trust by sale, donation or on death in terms of your Will. The rules of trusts in our country are a blend of English, Roman-Dutch and South African law and are governed by the Trust Property Control Act 1988. Although not a juristic person, there are certain instances where trusts are regarded as having a separate legal entity, such as in terms of the Income Tax Act.
How are trusts formed?
The person setting up a trust, known as the founder, must use a trust instrument to set up his trust. If the founder chooses to set up the trust during his lifetime, he will use a trust deed as the instrument to form an inter vivos (living) trust. If the founder intends for the trust to be formed on his death, he will use his Will as the trust instrument to set up a testamentary trust. The trust instrument – whether a trust deed or Will – must set out the aims and objectives of the trust, the names of the beneficiaries, the rights, obligations and powers of the trustees, and the duration and procedure for termination of the trust.
What are special trusts?
Special trusts are those which are created for people with special needs, for example individuals with serious mental or physical disability and who are unable to provide for themselves financially. This type of trust referred to by SARS as a Special Trust Type A. Special trusts can also be used to house assets bequeathed to minor children or beneficiaries in terms of one’s Will, and this is known as a Special Trust Type B.
What is a Special Trust Type A used for?
A Type A trust is created to provide financially for a person (or persons) with special needs such as a severe mental or physical disability. These trusts can be either testamentary or inter-vivos trusts, depending on the objectives of the trust founder, and are an excellent way of safeguarding assets and ensuring that your beneficiary is not taken advantage of – especially when you are no longer around. A Type A trust is set up in terms of Section 6B (1) of the Income Tax Act and enjoys special tax benefits that are not available to ordinary trusts.
To qualify as a special person in terms of Type A trust, the beneficiary must have a disability which limits his or her ability to function or perform daily activities, and can include physical, sensory, communicative, intellectual or mental impairment. In order to qualify, the beneficiary must have been diagnosed by a registered medical practitioner and must have had the impairment for a period of at least 12 months. Further, the impairment must be permanent in nature and the condition must not be reversible. If there is more than one beneficiary that qualifies as a special person, bear in mind that they should be related.
It is important to bear in mind that this form of special trust must be set up solely for the benefit of the disabled person, and there can be no benefit in it for the trustees. The trust must be registered with SARS as a Type A trust in order to enjoy the tax benefits afforded to such vehicles. While ordinary trusts pay income tax at the highest tax rate of 45%, tax rates applicable to natural persons ranging from 18% to 45% apply to Type A trusts. 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. In terms of managing the trust, it is advisable that at least three trustees be appointed, one of whom must be independent. Generally speaking, this type of trust ceases to exist from the beginning of the year of assessment in which the last beneficiary dies.
What is a Special Trust Type B used for?
A Type B trust, which can only be set up in terms of a Will, is used to house assets bequeathed to the testator’s minor children or relatives. This type of trust is ideal for those who have minor children and want to avoid their children’s inheritance being administered by the Guardian’s Fund in the event of their death. The youngest of the testator’s relatives should be under the age of 18 at the time of his death in order for the testamentary trust to be formed. It is important to note that if, for any reason, the testator’s Will is declared invalid, no testamentary trust will come into effect.
The income tax rates for Type B trusts are the same as those applicable to natural persons ranging from 18% to 45%, although this type of trust does not enjoy the same tax benefits as Type A trusts in the annual CGT exclusions and the primary residence exclusions. In general, the testator will stipulate that the trust will terminate at a pre-determined event, such as when the youngest beneficiary reaches a particular age, or on the death of an income beneficiary. In general, this type of trust will cease to be a Type B trust from the beginning of the year of assessment in which the youngest of its beneficiaries turns 18.
Special trusts can be effective estate planning tools if employed and set up correctly and for the right purposes. Setting up a special trust for mentally disabled or incapacitated beneficiaries can ensure the safe custody of assets while at the same time enjoying special dispensation in respect of income tax and capital gains tax. They can provide enormous peace of mind for parents of special needs children who are concerned that their children will be taken advantage of financially after their death. Similarly, for parents of minor children, setting up a testamentary trust to house assets bequeathed to them until they are old enough to manage their own money is an excellent way of protecting the assets while at the same time enjoying some tax benefits. Correct wording of the trust deed or Will is absolutely essential in order to ensure that the trust founder’s objectives are honoured and that his beneficiary’s assets are protected. As such, it is always advisable to seek the advice of a trust specialist when founding a trust.