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THE VALUE OF A TESTAMENTARY TRUST

by | May 1, 2021

A Testamentary Trust is a commonly used trust when it comes to estate planning. Unlike an inter-vivos trust, which comes into existence during the lifetime of the trust founder, a Testamentary Trust only comes into existence on the death of the testator/testatrix and can be used to protect and preserve assets bequeathed to minor children, mentally or physically disabled beneficiaries or a surviving spouse, including both financial and physical assets. A Testamentary Trust is created by including a trust clause in your will which effectively serves the same purpose as a trust deed. Bear in mind that there are certain formalities which must be met for the trust to be created when you pass away.

For example, your Will must contain clear evidence that you intend to create a trust, and it must identify the property or assets which should be moved into the trust, which can also be a nominated percentage of the residue of the estate. You must also nominate who the beneficiaries of the trust should be 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 dependents.

Children are considered to be minors until their age of 18 in south Africa, and do not have the 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 when you are no longer around. 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 or her 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, or the nominated age when the trust is to cease, the provision will simply fall away.

As the testator/testatrix, 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 completely to protect the assets for the benefit of your heirs and per your wishes. They should have a sound understanding of finance to ensure that your assets are properly controlled and managed, and that tax efficiency is achieved, and they should also have knowledge of the beneficiaries circumstances in order to ensure they can act in their best interests at all times. You do not need to appoint your child’s legal guardian as a trustee and it is sometimes better to have a separate person filling the role of trustee. The guardian will still be able to request access to the funds to cover expenses for the beneficiaries, but by them having to apply to a trustee other than themselves, it is just an additional barrier to ensure funds are not squandered, but used for the beneficiaries benefit.

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 come to an end. In general, a Testamentary Trust will terminate once the nominated beneficiary reaches a certain age, after a pre-determined period, or on the death of the income beneficiary. A Testamentary Trust can own immovable 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.

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 tax brackets, but such a trust must be set up in terms of the Income Tax Act to qualify for this favourable tax rates, as opposed to being taxed at normal tax rates, which are far higher.

If you have minor children, not making provision for a testamentary trust can lead to problems and unintended consequences after your death, namely:

  • In the absence of a Testamentary Trust, any assets bequeathed to your minor child will be held by the government’s 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 beneficiaries, or it is necessary to access more than R250,000 for the care of the beneficiaries, this may create financial difficulty for the guardians.
  • It is also important to consider that only money can be transferred to the Guardian’s Fund. In the case of immovable 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, as opposed to having the immovable property managed by a trustee/s up until the predetermined age nominated in the Will for the beneficiary/ies.