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Capital Legacy ensures is understands what clients’ wishes are for their loved ones and propose trust solutions that have a clear purpose. Picture: 123RF/FIZKES
Capital Legacy ensures is understands what clients’ wishes are for their loved ones and propose trust solutions that have a clear purpose. Picture: 123RF/FIZKES

It’s a common misconception perpetuated by misinformation and often ignorance that trusts are only for the rich — the benefits of which are only enjoyed by “trust fund babies”. 

Testamentary trusts are trusts you create through your will and when set up correctly they provide financial provision, safeguarding of assets, and certainty for beneficiaries, until they are able to manage their inheritances on their own.

This means they enable “financial guardianship” for your beneficiaries, much like a guardian who will care for your children. Capital Legacy has packaged these trusts into purpose-driven trusts that can meet the needs of beneficiaries.

What is a testamentary trust?

A testamentary trust is simply a trust that is established according to a deceased individual’s wish in their valid last will and testament. In other words, it’s planned for in your will but only comes into effect when you pass away. There are certain tax exemptions that may be applied to the trust depending on its specific purpose. 

This ensures the inheritance left to minor children or beneficiaries who can’t manage their own financial affairs, is managed well and to their benefit. If there is no trust in place, their inheritances are paid to the government Guardian’s Fund, which, though altruistic in purpose, has been victim to fraud and maladministration.

A testamentary trust is the only regulated alternative to the Guardian’s Fund. However, trustee fees could be exorbitant when considering the value of the capital being placed into trust, income accruing, and the number of years the trust needs to be active. 

Before making any decisions, first speak to a will-drafting specialist who can advise you on what you need to consider. Your will becomes the trust deed for the testamentary trust and it would have to be considered valid by the master of the high court when your estate is administered. It would be detrimental to your beneficiaries if your will is declared invalid, their inheritances paid into the Guardian’s Fund, and your estate administered according to the laws of intestate succession. 

Second, consult with a professional financial adviser to ensure the purpose of the testamentary trust is financially planned for. There is no sense in providing for a testamentary trust only for the trust to runs out of financial resources before the end of the trust term, and it cannot fulfil its intended purpose. As a fiduciary business, this is unfortunately a situation we have had to navigate all too often. 

At Capital Legacy, we ensure we understand what our clients’ wishes are for their loved ones and propose trust solutions that have a clear purpose. These purpose-driven trusts meet the needs of beneficiaries through methods that work and are easy to set up.

Three purpose-driven trusts that we frequently use:

1. Legacy Childrens Trust

When you provide for the Legacy Childrens Trust through your will, it will be created for minor children (under 18 years) at the time of your death and run until they turn 18 or reach the age specified in your will. Minor children cannot inherit directly, and so creating a testamentary trust ensures their inheritance is not left in the hands of guardians or the Guardian’s Fund, and that any property that they may inherit can be leased or sold. The Childrens Trust is classified as a Type B Testamentary Trust, which enjoys certain tax benefits by the SA Revenue Service (Sars).

2. Legacy Widows Trust

The Widows Trust is established to protect your spouse or partner’s inheritance, ensuring the estate left to them is not squandered or mismanaged by others, and that your spouse or partner is provided for until they pass away. This structure sees to it that your children or other beneficiaries also benefit from your estate when your spouse or partner passes away one day — creating a generational legacy. The purpose behind this trust is often overlooked because of the assumed tax implications, but this specific trust does not attract estate duty or capital gains tax which, as an estate planning tool, can save millions in life insurance and taxes.

3. Legacy Providers Trust

The Providers Trust secures the financial support of a person who needs financial help if they’re unable to provide for themselves or manage their finances. Parents of children with special needs such as cerebral palsy or autism often use this structure in their wills to make sure their children are looked after, even in their older age. The Providers Trust will only be classified as a Type A testamentary trust, which has favourable tax benefits if the beneficiary has been diagnosed with a mental disorder as provided for in the Mental Health Care Act 17 of 2002, or a serious physical disability, which precludes them from earning an income or managing their own affairs. 

Tax benefits and implications of trusts

When a testamentary trust is classified as a Type A or Type B, certain tax benefits are applicable which naturally benefit the beneficiaries of the trust. A trust is not a tax avoidance tool; tax still applies but it may be more favourable within a testamentary trust structure set up through your will.

The role of the executor and trustees with regards to a trust

Even though a testamentary trust is set up in accordance with the provisions made in a last will and testament, the executor of the deceased estate plays a role in the trust itself. The executor is responsible for ensuring the wishes of a deceased individual are carried out as far as reasonably possible, but they are not necessarily the ones who will administer the trust, unless you have provided for this through your will.

In SA, the Trust Property Control Act No 57 of 1988, in conjunction with the trust deed, governs the actions and decisions taken by trustees. So, the provisions you make in your will should include how the trust should be set up, when it should be ended, and what the duties of the trustees are and their limitations. 

About the author: Alex Simeonides is CEO of Capital Legacy. Picture: SUPPLIED/CAPITAL LEGACY
About the author: Alex Simeonides is CEO of Capital Legacy. Picture: SUPPLIED/CAPITAL LEGACY

In our wills, we make provision for a testamentary trust within the will in case one of the beneficiaries or their descendants are under 18. We also make provision for the executor and trustees to use their discretion on whether setting up a testamentary trust is financially viable at the time. The appointed trustees must remain objective and make decisions that are in the best interest of the beneficiary. It’s for this reason that we often encourage our clients to appoint a personal trustee and a professional one who remains independent.

Running costs of a testamentary trust

When establishing a trust, the trustees may charge for services such as:

  • initial set-up costs of the trust;
  • annual trustee fees for the management of capital; and
  • fees in the form of a percentage of income received by the trust.

The trust also needs to have annual financial statements which incur accounting costs, and the income tax rules are applied to the income received by the trust.

Sometimes these fees seem prohibitive, and people end up avoiding a trust structure even though it may be the best solution for their needs — especially when minor children are involved. Capital Legacy’s Legacy Protection Plan covers the costs of setting up and running a trust, as well as other legal costs related to executing an estate, such as executor and conveyancing fees.

Combining sound fiduciary advice with sound financial advice means you can provide your beneficiaries, especially the young and vulnerable ones, with certainty when you are no longer around. A trust can be an efficient vehicle for the everyday man and shouldn’t be misconstrued as something only used by the rich and famous. 

To find out more about wills and trusts, visit: www.capitallegacy.co.za.

This article was paid for by Capital Legacy.

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