Is a testamentary trust a solution in estate planning?

IN THE context of estate planning, a trust can be described as a legal relationship that has been created by a person (known as the founder, donor or settlor) through placing assets under the control of another person (known as the trustee) during the founder’s lifetime (an inter-vivos trust) or on the founder’s death (will trust, testamentary trust or trust mortis causa) for the benefit of third persons (the beneficiaries). Your assets can be bequeathed in terms of a testamentary trust or to an inter-vivos trust. It makes sense proactively to structure assets in a trust as part of your estate planning. A testamentary trust or an inter-vivos trust can be used for this purpose. It is important to do a proper evaluation of your individual circumstances before you decide on the type of trust to be used. The main difference is that if you create a testamentary trust upon your death, capital gains tax (CGT), estate duty and executor’s fees will be payable before the assets are transferred into the trust, whereas assets accumulated in an inter-vivos trust will not attract any taxes upon your death. Testamentary trusts are particularly suited to the protection of the interests of minors and other dependants who are not able to look after their own affairs, should you not already have an inter-vivos trust. Testamentary trusts are usually created to hold assets on behalf of minor children, since minor children cannot, under South African law, inherit anything directly, but only through a guardian. The child’s guardian does not necessarily have to be a trustee; in fact, it is often a good check and balance to have a separate, independent person as trustee, who is financially astute. In the absence of a trust, assets from the deceased estate left to minor children are sold and the money is kept in the Guardian’s Fund. The money is paid to them when they reach adulthood. If you do not set up an inter-vivos trust while you are alive, you can stipulate in your will that you want a testamentary trust to be established upon your death. Testamentary trusts are created at the winding up of a deceased estate following a specific stipulation in the person’s will that a trust must be set up. Such a stipulation serves the same purpose as a trust deed. The terms of a testamentary trust are typically not as detailed as with an inter-vivos trust. Sometimes, a full trust deed is attached to a will instead of incorporating the usually shorter provisions of a testamentary trust in the body of the will. This does provide more comfort and assurance that the testator’s wishes will be honoured. In this case, make sure your will deals comprehensively with the establishment of the testamentary trust. Your will should spell out who the trustees will be, who the beneficiaries will be, the responsibility of the trustees, and any other conditions. These provisions should be detailed enough to protect your assets for your heirs. Often, wills do not provide sufficient measures to ensure that trusts are executed properly. A testator appoints the trustees in his or her will, and their roles as trustees usually end after a predetermined period or at a determined date, such as a minor turning 18 years old or upon the death of an income beneficiary. During the settlement period of the deceased estate, the appointed trustees apply for a letter of authorisation at the office of the Master of the High Court where the estate is registered. If for any reason the will is invalid, the trust will not come into effect. The Master therefore has the power to declare this type of trust invalid, unlike an intervivos trust, where the master has no such power. In South Africa, there is freedom of testation, where an individual has the right to determine the heir(s) to his or her property upon his or her death. This means that a court cannot – generally speaking – vary the terms of a testamentary trust once the founder has died. The trustees also cannot amend the trust deed on their own. Section 13 of the Trust Property Control Act is important, because it grants the court certain powers in terms of the amendment of a trust deed. The section provides that:

◆ If a trust instrument contains a provision that brings about consequences that, in the opinion of the court, the founder did not contemplate or foresee; and

◆ That hampers the achievements of the objects of the founder; or prejudices the interests of beneficiaries; or is in conflict with public interest; then

◆ The court may (on application of the trustee or any interested person) delete or vary such provision or make any order which the court deems fair under the circumstances, including an order to terminate the trust.

This means that a trustee, or any other interested person, can apply to the court to have a testamentary trust amended as envisaged in terms of this section. The Master also confirmed in a directive issued in March last year that a testamentary trust cannot be amended by the trustees and beneficiaries, although beneficiaries may renounce their rights. Before you opt for a testamentary trust, be aware of the following:

◆ Estate duty, CGT and fees are paid on all assets before transfer to the trust upon your death;

◆ Most testamentary trust provisions in wills are insufficient to properly execute the trusts;

◆ If the Master declares the will invalid, the trust will not come into existence; and

◆ It may be difficult to amend the trust deed when the need arises. Do not blindly accept a will that creates a testamentary trust. It may be worth your while to consider an intervivos trust instead.