“ARE TESTAMENTARY TRUSTS USEFUL IN PLANNING YOUR ESTATE?”

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Many clients are advised to make use of a testamentary trust while attending to their estate planning and one of the most asked questions relates to the benefit of having a testamentary trust versus a bequest to a minor heir directly.

A testamentary trust is a trust created in a Will and will only arise on the death of the testator.  This type of trust can be a particularly useful way to protect a minor child’s inheritance whilst still providing for the maintenance of the spouse.

In the absence of the provision for a testamentary trust, any benefit bequeathed to a minor child (a person under the age of 18) will go to the Guardian’s Fund who administers funds paid to the Master of the High Court on behalf of such minors.

Although the interest paid on monies administered by the Guardian Fund will be for the benefit of the minors are relatively competitive, the interest gets paid annually and no tax planning is therefore possible.  The asset allocation of the fund also makes it difficult to ensure adequate capital growth to neutralise the impact of inflation and withdrawals from the Guardian Fund are limited to a maximum of R250 000 in capital from the fund until the minor turns 18, regardless of how much money was paid into the fund.  Only money can be transferred to the Guardian’s Fund and fixed property will therefore either be sold or registered in the minor’s name and handed to the legal guardian to be managed for the minor’s benefit.

In contrast, monies and other assets in a testamentary trust can be managed on behalf of the minors which circumvents the limitations mentioned above on monies paid into the Guardian Fund.  More often than not, trustees know the minors personally and can therefore better determine their needs and requirements and act accordingly.  For example, if funds are required, fixed property in a testamentary trust can be sold by the trustees if it is in the best interest of the beneficiary without the consent of the High Court, a costly exercise, being required for the sale.

Testamentary trusts can furthermore be a useful tool to ensure adequate maintenance to the surviving spouse while protecting the assets for future generations, especially, where the surviving spouse is not related to the children or grandchildren of the deceased. In such cases, a testamentary trust can be used to safeguard the property against impulses of the surviving spouse and ensure the future benefit for his / her descendants, while ensuring that assets are available to provide maintenance for the surviving spouse.  For example, the surviving spouse will have a vested right to the net income of the trust, but the trust capital can then, after the death or re-marriage of the surviving spouse, be distributed to the children of the testator.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)