The role of a testamentary trust in your estate plan

A testamentary trust, being the most commonly used trust in South Africa, is set up in terms of your last will and testament to house assets intended for those who are incapable of managing their own financial affairs, such as minor children or those with disabilities. In this article, we take a closer look at the value a testamentary trust can play in your overall estate plan.

A testamentary trust can be used effectively to house assets that you intend to bequeath to your minor children. Bear in mind that our law prohibits children under the 18 from inheriting directly which means that any funds bequeathed directly to a minor child will be administered on their behalf by the State-run Guardian’s Fund. Immoveable property bequeathed directly to a minor child will be administered by the child’s legal guardian until the child reaches age 18. A testamentary trust can also be used to house assets for beneficiaries who are mentally or physically disabled and who are incapable of managing their own affairs. If you have a child who suffers from a permanent mental or physical disability, you can bequeath any assets intended for that child to your testamentary trust where your nominated trustees will administer the trust assets for the benefit of your special needs child.

Being testamentary by nature, your last will is effectively the founding document of the trust and, as such, should make specific provision for the formation of trust in the event of your passing. Your will should therefore include the details of your nominated trustees, the powers and duties of the trustees, named beneficiaries of the trust, and those assets that must be transferred to the trust in the event of your death. As a word of caution, if your will is found to be invalid, for whatever reason, no testamentary trust can be formed which can result in your beneficiaries being financially prejudiced.

Where your trust is set up for the benefit of a mentally or physically disabled person, the trust may qualify as a special trust Type A in terms of Section 6B (1) of the Income Tax Act in order to enjoy a more favourable tax dispensation. However, there are strict qualifying criteria that must be met in order to qualify as a special trust Type A, and it is advisable to seek guidance from a fiduciary expert in this regard. If setting up a testamentary trust to house assets for your minor children – known as a special trust Type B – note that in order to qualify as such, your youngest beneficiary must be under the age of 18 at the time of your passing. Income tax rates for Type B trusts are the same as those applicable to natural persons ranging from 18% to 45%. In light of the above, ensure that your testamentary trust is correctly classified as Type A or Type B as this will affect the manner in which it is taxed.

It is important that you give careful thought to those you intend to nominate as trustees as they will ultimately be entrusted with managing the trust assets when you are no longer around. All trustees are bound by a set of fiduciary, common law, and statutory law duties, and it’s vital that they understand their obligations upon being nominated. Most importantly, your trustees will be duty-bound to act at all times in the best interests of your beneficiaries and to treat your beneficiaries impartially. They’ll also be required to actively participate in the management of the trust, to avoid conflicts of interest, and ensure that the tax affairs of the trust are kept up-to-date. Although your trustees may outsource some of their functions (such as bookkeeping and accounting), they will remain personally liable for the sound management of the trust’s affairs. Importantly, your trustees have a fiduciary duty which means that they will be held to a greater standard of care, equivalent to that of a company director.

The powers of your nominated trustees must be set out in terms of your will, with generally one of the first functions being to take control of the trust assets. In the case of immoveable property, your trustees will need to ensure that the property is registered in the name of the trust and obtain the property’s title deed. In the case of investments, your trustees must ensure that the investment reflects in the name of the trust. Your trustees will have the power to make investments on behalf of the trust, take out insurance, provide maintenance to your minor or disabled children, and remunerate any professional trustees that have been appointed, amongst other powers.

Your trustees will be responsible for keeping accurate account records which must be made available to the Master if requested. Trustees also have a duty to attend to all statutory filing such as tax returns, VAT returns and PAYE. Keep in mind that trusts are registered as provisional taxpayers and are therefore subject to provisional tax which is usually payable as per the provision tax period intervals. Their tax year runs from March to end-February each year. Trustees will also be required to ensure that trustee meetings take place in accordance with the trust deed, and that accurate minutes of all meetings are kept. If the trust deed requires that the trust be audited, the trustees will be responsible for ensuring that annual financial statements are timeously prepared.

From a liability perspective, note that a trust is not a recognised legal person in terms of our law and, as such, cannot be sued. However, your trustees may be sued in their official capacity for any negligent or intentional wrongdoing. With this in mind, note that your trust deed cannot indemnify your trustees from liability, and they will remain jointly and severally liable for their actions to the extent that the trust suffers damages.

While a testamentary trust is a seemingly simple estate planning concept, there are a number of legal complexities that need to be navigated to ensure that criteria are met and that the trust is found to be valid. As such, we recommend that you seek advice from an experienced estate planner to assist with setting up your testamentary trust in your Will.

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