The most popular type of trust in South Africa is a testamentary trust, which is established under the rules of your last will and testament to hold assets meant for people who are unable to manage their own financial affairs, such as young children or people with disabilities.
We examine the importance of a testamentary trust in your entire estate plan in more detail in this article.
The beneficiaries of a testamentary trust
You can successfully use a testamentary trust to hold assets that you want to leave for your minor children. Remember that our government forbids under-18s from receiving inheritances directly, thus any money left directly to a minor will be managed on their behalf by the state-run Guardian’s Fund. When a minor child receives a direct bequest of movable property, their legal guardian will manage it until the child becomes eighteen.
Assets for beneficiaries who are physically or mentally incapacitated and unable to handle their own affairs can also be housed in a testamentary trust. If your child has a lifelong mental or physical handicap, you can leave whatever assets you would have liked for that child to your testamentary trust. Your designated trustees will then manage the trust assets on your child’s behalf.
The importance of your will
Your final will and testament, which is testamentary by nature, serves as the trust’s foundational document and, as such, should include special instructions for the creation of trust in the event of your passing.
As a result, your will should contain information about the trustees you have chosen, their responsibilities and authority, the beneficiaries you have designated for the trust, and the assets that, in the event of your passing, must be given to the trust.
Be advised that no testamentary trust may be established in the event that your will is deemed invalid for any reason, which may cause financial hardship for your beneficiaries.
Taking advantage of tax
In order to benefit from a more advantageous tax treatment, your trust may be eligible as a special trust Type A under Section 6B (1) of the Income Tax Act if it is established for the benefit of a person who is mentally or physically impaired. But there are stringent requirements that need to be met.
In order to qualify as a special trust Type A, it is advisable to consult a fiduciary expert in this regard. If you are creating a testamentary trust to hold assets for your minor children (a special trust Type B), be aware that your youngest beneficiary must be under 18 at the time of your death. The income tax rates for Type B trusts are the same as those that apply to natural persons (18% to 45%). Taking all of this into consideration, make sure that your testamentary trust is correctly classified as either Type A or Type B, as this will affect how it is taxed.
The financial obligation of your trustees
Since they will be in charge of overseeing the trust’s assets after your death, it is crucial that you carefully consider the people you want to name as trustees. Every trustee has a set of statutory, common law, and fiduciary duties, therefore it’s critical that they are aware of them when they are nominated.
Above all, your trustees will have an obligation to act in your beneficiaries’ best interests and to treat them fairly at all times. In order to prevent conflicts of interest, they must also actively participate in the trust’s management and make sure that its tax affairs are maintained.
Your trustees will also be in charge of maintaining correct account records, which they must provide to the Master upon request. Trustees are also required to handle all statutory filing, including pay-as-you-earn, VAT, and tax returns. Remember that trusts are required to pay provisional tax, which is often due at the intervals specified by the provision tax period, as they are registered as provisional taxpayers.
Expert guidance is essential
Even though testamentary trusts appear like straightforward estate planning tools, there are a lot of legal nuances that must be understood in order to make sure that all requirements are satisfied and the trust is upheld.
For expert estate planning advice, speak to our Estate Planning Team who will take a sensitive and personal interest in ensuring your estate plan is optimally designed to take care of your loved ones.