DANIEL BAINES: Advantages of setting up a trust to benefit a disabled person
The disabled person may be looked after by the trust upon the death of the founder
While much has been written about the continuing effectiveness of trusts in SA due to recent changes in our legislation, there is one type of trust that is not affected by recent amendments and which can still add great value to the life of disabled people.
This type of trust is called a type A special trust, which may be set up to assist people with disabilities.
The requirements of a type A special trust are:
• The trust must be established solely for the benefit of one or more people who have a disability; and
• This disability incapacitates the disabled person(s) from earning sufficient income for their maintenance or from managing their own affairs.
If the trust is set up for more than one person, the people must be related. There is, however, no requirement that the founder of the trust is related to the disabled person. In other words, the founder of the trust may set up a trust for a friend who is disabled, but that trust cannot have another beneficiary (besides the friend) who is not related to the friend. There is no age restriction for a person to be a beneficiary of a type A special trust.
A disability for the purposes of a type A special trust means a moderate to severe limitation of a person's ability to function or perform daily activities as a result of a physical, sensory, communication, intellectual or mental impairment. The limitation must have lasted more than one year, must have been diagnosed by a doctor and must still be apparent after sufficient steps have been taken to correct the limitation.
Benefits of a type A special trust include:
1. Reduced tax rates: A type A special trust is taxed on the same sliding scale as individuals, as opposed to a normal trust which is taxed at the flat rate of 45%. This means that the disabled beneficiary of the special trust will receive more after-tax money than if a normal trust had been set up and the income was taxed in the hands of the normal trust.
2. Continuity: The disabled person may be looked after by the trust upon the death of the founder of the trust. It is wise to appoint other trustees to the trust who would ensure that the trust continues.
3. Loans or donations: The founder of the trust may transfer money/assets to the trust for the benefit of the disabled person by either an interest-free loan or a donation. (As mentioned above, a special trust is not affected by recent legislative changes and a person may still make an interest-free loan to a special trust without negative tax consequences.) It must be noted that if the donation route is taken, there may be negative tax consequences in the form of donations tax and/or the income received as a result of the donation being taxed in the hands of the donor.
4. Capital gains tax benefits: Special trusts also have access to certain capital gains tax benefits not available to normal trusts (but available to individuals).
Though normal trusts may have lost their attractiveness as an investment tool, type A special trusts are still extremely useful and should be considered by anyone who is entrusted with the wellbeing of a disabled person. Please note there are certain deeming-of-income provisions that must always be considered when dealing with a trust.
• Baines is a tax consultant at Mazars and the author of How to Get a Sars Refund