ESTATE PLANING AND THE BENEFITS OF TESTAMENTARY TRUSTS

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Estate planning is an important factor to take into consideration and will assist in providing a safety net for your loved ones in the unfortunate but certain event of death. Making provision for a Testamentary Trust in your will is a great manner in which to protect and preserve assets bequeathed to minor children, mentally or physically disabled beneficiaries and/or even a surviving spouse.

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A Testamentary Trust is created upon the death of an individual, the “testator”, the terms of the Trust is set out in detail in the testators will, which will set our how the assets in his/her estate is to be managed by appointed trustees for the benefit of beneficiaries as listed above, although there are no restrictions on the nomination of beneficiaries. Trustees are nominated by the testator and will have the duty to manage the trust, it therefore important to appoint persons you trust to fill this role. Trustee’s will have a fiduciary duty to manage the Trust assets in the best interests of the nominated beneficiaries, this duty should not be taken lightly. We advise that when appointing your trustees try to appoint persons with administrative and legal skills. 

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One of the main advantages of a Testamentary Trust is that the testator has peace of mind that a particular heir’s inheritance is administered, invested and managed according to his or her wishes. The testator will include certain clauses setting out the duties and responsibilities of trustees which may include inter alia the following: use of the capital for the Maintenance, education, benefit and advancement in life of a nominated beneficiaries.

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When the beneficiary is a minor child (under the age of 18) or a disabled person, the trust can be registered as special trust with the South African Revenue Service (“SARS”), which results in the trust being taxed at the same rate as natural persons, as opposed to other trusts that are taxed at the maximum marginal rate of 45%, provided that the trust has been set up in terms of the Income Tax Act.

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In the event that you don’t make provision in your will for a testamentary trust to benefit your minor children, this can lead to unintended consequences after your death. In the absence of Testamentary Trust, any assets you leave to your minor children will be held by the Guardians Fund which is administered by the Master of the High Court. The funds held by the Guardians Fund will be predominately invested at below market interest rates which will stunt the capital growth of the assets and be unfavourable to the beneficiaries.

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Another disadvantage of having the funds administered by the Guardians Fund is the maintenance pay outs are quite untimely and could affect the quality of care the minor child will receive. The Guardians Fund usually pays all interest derived by the funds to the minors annually, however, there is a cap of R250 000.00 that may be paid out to the minor until the age of 18.

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In light of the above, making provision for a Testamentary Trust will only be to the benefit to the ones you leave behind and as such, we urge all our clients to make informed decisions and request assistance from our offices when planning their estate.

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For any assistance on estate planning, trusts or wills, feel free to contact our offices on 011 646 8411 or email us.

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-Philip Da Silva