Estate planning is not only about the accrual and use of your assets during your lifetime — it also involves the final division of your assets at your death for the benefit of your family.
To ensure that you successfully transfer your wealth from one generation to the next, it is important that you plan appropriately and by means of professional advice.
A trust is a safe and effective channel to ensure that your assets are managed objectively, since it is controlled in accordance with your will’s instructions via a trustee who is bound by the Trust Property Control Act.
Types of trusts
Trusts are created primarily in two ways, namely through a will, known as the testamentary trust, or a written agreement between the founder and the first trustee during the founder’s lifetime, known as the inter vivos trust.
A testamentary trust is created in a will and comes into operation only at the time of your death.
After your estate has been finalised, your executor must transfer the inheritance or trust assets to the trustee. Only then does the trustee take control of the assets.
No trustee may act on behalf of a trust or make any decision on a trust asset before the Master of the High Court confirms the appointment by means of a letter of authority. This is the official registration document that contains the registration number, the name of the trust and the full names of all the trustees.
Types of beneficiaries
There are two types of beneficiaries in a trust: the income beneficiaries (those who are entitled to the income generated by the trust) and the capital beneficiaries (those who are entitled to the capital assets). It is possible to be both an income beneficiary and a capital beneficiary at the same time.
When should one consider a testamentary trust?
There are several reasons why people create trusts:
• To protect immature or dependent beneficiaries. Minor children under the age of 18 cannot receive their inheritance until they reach maturity and if there is no testamentary trust, their inheritance must be paid into the guardian’s fund of the Master of the High Court.
A testamentary trust on the other hand can make provision for the income to be used for the maintenance, education and general welfare of the minor and, if the income is insufficient, even capital can be used. The will can make provision for the capital to be invested in a wide range of investments, for example fixed property, shares, unit trust investments, policies, money market accounts and so on. Payments can be made on a regular basis (monthly) and/or on an ad hoc request basis. If the money is transferred into the guardian’s fund, income is payable only quarterly and no ad hoc payments are allowed. The capital can be invested only in cash investments.
• For a child who is physically or mentally challenged. In such cases the will can make provision for the income to be used for the benefit of the child and make the capital payable to other beneficiaries after the death of the said child.
• To protect other beneficiaries, such as a child who is insolvent, or even in the event of a child who is married in community of property and the spouse of the said child is in a business with a high element of risk.
• Trusts can be used when assets, such as a farm, cannot be divided among several heirs.
• A trust also offers several estate planning techniques, which require accurate planning.
• If you want to leave assets for charity and it must be administered ad infinitum, a trust is the answer.
Limitations of a testamentary trust
• Because of certain legal principles, a major is entitled to access the inheritance once he/she reaches maturity.
• When a trust terminates as stipulated in the will and assets are transferred to the beneficiaries, the assets are vested in their personal estates and thus increase their dutiable estate for estate duty purposes.
Because the legal age of maturity has been reduced from 21 to 18 years, it is recommended you specify the age at which the beneficiary reaches maturity in terms of the trust. You might wish to specify that the beneficiary needs to reach age 23, for example.
Berrie Botha is CEO of Sanlam Trust
Next month we look at inter vivos trusts or living trusts