Testamentary Trust
Key Takeaways:
Testamentary trusts are established through wills, becoming active upon the testator's passing.
They offer flexibility, allowing control over asset distribution for specific beneficiaries.
Testamentary trusts provide a strategic tool for addressing unique family and financial dynamics.
When discussing trusts (and the possible formation of one), most people associate the terminology with wealthy families looking after their own, especially upon death. And that is not wrong - family trusts (where all the beneficiaries to a trust are family members) do exist and are sometimes used for this very reason.
But in South Africa and according to the Trust Property Control Act, 57 of 1998, a trust is defined as
“an arrangement through which the ownership in property of one person is by virtue of a trust instrument made over or bequeathed:
to another person, the trustee, in whole or in part, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument; or
to the beneficiaries designated in the trust instrument, which property is placed under the control of another person, the trustee, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument,
but does not include the case where the property of another is to be administered by any person as executor, tutor or curator in terms of the provisions of the Administration of Estates Act, 66 of 1965.”
Put simply - a trust is a type of legal “structure” (for lack of a better description) which has been set up by the founder(s) of the trust (i.e. the settlor or donor - the person who initiates the trust and who donates the property for another’s benefit) according to their exacting specifications. Usually, property is transferred/assets are transferred to the trust which is then administered by trustees who are nominated by the founder(s) in the trust deed or will (as the case may be) on behalf of one or more beneficiaries. The trustees are responsible for administering the assets in accordance with the trust deed and the laws relating to trusts.
Why would you need a trust?
Mostly for estate-planning purposes.
Estate planning involves putting together and crafting several legal documents and processes that will have the effect of creating and maintaining a lifestyle for you and your family while you are alive and thereafter for your loved ones after your death. Planning your estate, will ensure your loved ones are taken care of. Properly. And forming a trust has a lot to do with this.
Estate planning is crucial if you are married, have been married multiple times, have children from different relationships or support people financially. It will allow the protection of your loved ones from legal stresses and financial insecurity after your death. You have the chance to ensure that your estate duties are minimised and that there is sufficient liquidity to meet your estate's financial obligations upon your death - ultimately ensuring that any inheritances are sufficiently distributed or protected for your younger beneficiaries.
For estate planning purposes, there are a few advantages in placing assets in a trust (generally speaking) -
The protection of assets from creditors
The ownership of an asset by a trust can protect a family’s assets from potential creditors. Furthermore, such an asset will not fall into the personal estate of the beneficiary and will therefore also be protected from the beneficiary’s creditors;
Succession planning (a trust does not die)
A trust survives the life of an individual and ca therefore, span multiple generations, ensuring continuity and allowing for seamless succession. On the death of the trust founder, the assets held in trust will not form part of the winding-up process, and this can provide the beneficiaries with ongoing access to funds after the founder’s death. The trust will also not be liable for or subject to estate duty (i.e. the growth belong to the trust), other taxes or costs, such as transfer duty, executor’s fees, conveyancing fees or Capital Gains Tax (provided the asset is not sold) that would otherwise be payable in the hands of the estate or the heirs.
Protection of assets
A beneficiary cannot sell a right in a trust (unlike shares in a company). Therefore, if a beneficiary becomes insolvent, the assets in the trust continue to be protected. Likewise, if you as the donor or trustee become insolvent, the trust’s assets remain protected.
Tax planning
If correctly set up, a trust can be administered to mitigate estate duty, income tax, Capital Gains Tax, donations tax and transfer duty 9as set out above). Furthermore, if the trust earns R100 000, it can be split between beneficiaries so that they each earn a share of the R100 0000. Assuming the beneficiaries earn no other income, they would pay no tax as this amount is below the threshold. This is the so-called split income principle i.e. income tax is levied against the trust, but income distributed is taxed in the hands of the beneficiary.
Centralised management of assets
Depending on the circumstances of the founder, a trust can be used to centralise and control assets on behalf of beneficiaries who are unable to do so themselves, such as in the case of a mentally or physically handicapped child. A trust is also an excellent vehicle for housing indivisible assets such as a family holiday home or farm on behalf of multiple beneficiaries.
Creditor protection in the event of the trust beneficiary’s insolvency
As the assets are not owned by either the trustees or the beneficiaries, a creditor would therefore have no claim against them.
There are essentially three types of trusts in South Africa, one of which is testamentary trusts.
Testamentary trusts
Sometimes referred to as a will trust, it is only comes into existence on the death of the testator when it is created by the inclusion of a trust clause in a Will.
The will itself will stipulate that a trust must be set up upon that person’s death. It is effectively used to protect and preserve assets bequeathed to minor children, mentally or physically disabled beneficiaries or a surviving spouse by holding assets on behalf of minor children for example
The terms of a testamentary trust are written into a will and will therefore only come into existence after the testator has passed away. The will therefore forms the basis of the trust document.
The benefit of a testamentary trust?
In many instances this type of trust seeks to protect the interests and inheritance of minors or vulnerable members of the family (such as elderly parents or spendthrift major children) following their parents death, or the death of the financial provider, and is therefore appropriate in these circumstances. Since the trust is only established on your death, it does not provide any protection for your assets during your lifetime.
Who is a testamentary trust ideal for?
A testamentary trust is ideal for parents with minor children or people with vulnerable members in the family.
A testamentary trust may be suitable for you if you:
have children below the age of 18 who are still financially dependent on you; and/or
have vulnerable members in your family such as elderly parents, spendthrift major children, children suffering with substance abuse; and
want peace of mind that your children/family members will be taken care of when you are no longer able to do so yourself through the safeguarding and optimal use of their inheritance.
What is needed to set up a testamentary trust?
When setting up a testamentary trust, the will becomes the trust instrument through which the Trustees are appointed. Therefore there are no fees involved here.
According to the Department of Justice and Constitutional Development -
The following documents will however be necessary -
Application form (J401);
Completed Acceptance of Trusteeship (J417) and Acceptance of Auditor Application (J405) forms, and
Beneficiary Declaration (J450)
For the testamentary trust the completed acceptance of trusteeship and the photopage of the trustees ID document by each trustee and all the requirements listed on form JM21 have to be lodged.
On receipt of all the required documents, the Master may issue the nominated trustees with letters of authority to administer the trust.
Note: no trustee may act as such without the written authority of the Master.
Trustees should keep accurate financial statements to comply with their fiduciary obligations to the beneficiaries. The Master may request the trustees to account for the administration of the trust.
Why should you trust Benaters with the intricacies of a testamentary trust?
The complexities around the type of trust you form, or who to appoint as Trustee (especially in light of your overall estate planning process), must be discussed with your trusted legal advisor (such as the attorneys at Benaters) who will be able to advise you on the best way forward - there is just so much to take into account (with numerous applicable legislation), that it is critical for you not to take on this process alone. Seeking the assistance of professionals who have had vast experience in all there is to do with trusts is the only way to go.
If you require any assistance with the formation of a trust or deciding who to appoint as a Trustee, the attorneys at Benaters have in-depth knowledge and are able to assist you with all trust related issues and queries.
We have assisted many individuals and families with their trusts and have been able to successfully support and guide them through the entire process, which has (on a number of occasions) lead to both the administration of deceased estates as well as being the appointed as Trustees.
We are here to help you. In any way we can!
So please, get in touch today and let us see how we can assist you with what is a really important decision. You can put trust in us too. We will undertake your matter, as always, with professionalism and the utmost due care.
There are essentially three types of trusts in South Africa, one of which is inter-vivos trusts.
Inter-vivos trusts
A Latin phrase meaning “while alive” or “between the living”, an inter vivos trust is set up during the founder of the trust’s lifetime. The goal of an inter vivos trust is to protect estate planning goals and (usually) specific assets.
Once formed, the trust can be used to house certain assets or investments for the benefit of the trust’s beneficiaries and is effective in protecting the (usually) specific assets by limiting estate duty liability, bolstering succession planning, or protecting certain assets from creditors.
The trust assets are managed and administered by the appointed Trustees of the trust as per the trust deed.
When setting up an inter vivos trust, the trust deed is your trust instrument and would appoint your Trustees. The trust founder would effectively enter into an agreement with the Trustees to give effect to the trust.
The benefit of an inter-vivos trust?
A discretionary inter vivos trust gives the trustees a mandate to manage the trust assets in the best interest of the beneficiaries and is, therefore, an extremely flexible and effective vehicle for protecting and managing assets. Using their discretion, the trustees can make decisions as and when circumstances, legislation, and fortunes change. In addition, where an inter vivos trust is used to provide for a beneficiary who is physically or mentally disabled, it can qualify as a special trust with certain tax benefits.
Who is an inter-vivos trust ideal for?
An inter vivos trust can be seen as a type of wealth structuring tool that is used for various purposes, like protecting assets across generations. This is especially key if you want to leave an inter-generational legacy, which will enable you to support beneficiaries financially during and after your lifetime.
It is therefore ideal for those who want to protect their assets for future generations both during and after their lifetime.
What is needed to set up an inter-vivos trust?
According to the Department of Justice and Constitutional Development -
The inter-vivos trust must be registered with the Master in whose area of jurisdiction the greatest portion of the trust assets are situated. If more than one Master has jurisdiction over the trust assets, the Master in whose office the trust was first registered will continue to have jurisdiction.
The following documents must be lodged to enable the Master to register an inter vivos trust and to issue letters of authority to the nominated trustee(s):
Original trust deed or notarial certified copy thereof.
Proof of payment of the applicable fee (available on the Chief Master's Directives page), for registration of a new Trust. There are no costs involved in amending an existing Trust.
See the following circulars/gazettes relating to the fees:Updates to Trust registration fee: Administration of Estates Act: Regulations: Amendment(English/Afrikaans) GG 41224, GoN 1162, 3 Nov 2017
Chief Master's Directive 2012-01 (Method of payment of fees charged by the Master) effective as from 12 March 2012
Trust Property Control Act: Regulations: Amendment on Fees payable at lodgement of trust instrument &Fees payable at lodgement of trust instrument (English/Afrikaans), GG 41224, GoN 1162, 3 Nov 2017
Application form (J401);
Completed Acceptance of Trusteeship (J417) and Acceptance of Auditor Application (J405) forms;
Beneficiary Declaration (J450);
Trustee(s) Identification – Certified copies of ID / Passport / Organization Proof of Registration (CK1);
Trustee(s) Representative Identification – Certified copies of ID or Passport (Mandatory for Organization Trustee(s));
Beneficiaries Identification – Certified Copies of ID or Birth Certificates / Passport /Organization (CKI);
Bond of security by the trustees - form J344 (if required by the Master) or Proof of Exemption (If applicable), and
Final Certified Court Order (if applicable).
Note: the trustee(s) must ensure that they are granted authority to act before acting or transacting on behalf of the trust. The Trustees will only have authority to act on behalf of the trust once the Master has issued the letters of authority.
Why should you trust Benaters with the intricacies of an inter-vivos trust?
The complexities around the type of trust you form, or who to appoint as Trustee (especially in light of your overall estate planning process), must be discussed with your trusted legal advisor (such as the attorneys at Benaters) who will be able to advise you on the best way forward - there is just so much to take into account (with numerous applicable legislation), that it is critical for you not to take on this process alone. Seeking the assistance of professionals who have had vast experience in all there is to do with trusts is the only way to go.
If you require any assistance with the formation of a trust or deciding who to appoint as a Trustee, the attorneys at Benaters have in-depth knowledge and are able to assist you with all trust related issues and queries.
We have assisted many individuals and families with their trusts and have been able to successfully support and guide them through the entire process, which has (on a number of occasions) lead to both the administration of deceased estates as well as being the appointed as Trustees.
We are here to help you. In any way we can!
So please, get in touch today and let us see how we can assist you with what is a really important decision. You can put trust in us too. We will undertake your matter, as always, with professionalism and the utmost due care.
