By Kwena Madinginye, LindsayKeller associate
A testamentary trust is the most commonly used form of trust in South Africa. It is created by a trust clause in a will, in which the testator bequeaths assets to the trust and stipulates the terms and conditions that will apply to the trust.
A testamentary trust only comes into existence upon the death of the testator. If for any reason the will is invalid, the trust will not come into effect. Testamentary trusts are an effective way of protecting the interests of minors (children under the age of 18), who cannot inherit assets directly. Minors do not have the legal capacity to enter into agreements or contracts without the assistance of a legal guardian (in the absence of a biological parent or natural guardian). It is essential that when parents do estate planning they consider what a trust entails, who will be entrusted with the daily care and custody of the children, and how and by whom the assets which the children inherit will be managed.
A trust is a legal entity that is created to hold assets for the benefit of certain persons or entities. It is not a juristic legal person but there are times when, in terms of certain statutes, a trust is regarded as having a separate legal identity (for example, for tax purposes). Without legal personality, a trust does not have legal standing and therefore cannot sue or be sued.
A testamentary trust is created by a trust clause in the will, in which the testator bequeaths assets to the trust and stipulates the terms and conditions which will apply. The appointed trustees administer the trust in terms of the will until the trust terminates, usually after a predetermined period or at a determined event, such as a minor turning eighteen or the death of an income beneficiary.
A beneficiary of the trust is the individual or group of individuals for whom a trust is created. The trust creator or grantor designates beneficiaries and a trustee, who has a fiduciary duty to manage trust assets in the best interests of beneficiaries, as outlined in the trust agreement.
The advantage of creating a testamentary trust for a minor is that it has continuity, survives the life of an individual and can span multiple generations. It can protect the deceased’s assets from creditors and matrimonial relationship disputes. The services, knowledge and abilities of the trustees are used to administer the trust. Custodianship of assets prevents the assets from being squandered. Trust assets are properly controlled and managed, and tax benefits can be created by correctly distributing income and capital gains. Estate duty can be minimised or capped because the growth of an asset is no longer in the hands of a mortal person.
Problems arise when no provision is made for a testamentary trust. In such a case, any funds bequeathed to a minor will be held by the Guardian’s Fund, which falls under the administration of the Master of the High Court. These funds are not freely accessible and are usually invested at below-market interest rates. This can easily frustrate a guardian when trying to release funds for a minor’s maintenance and benefit.
It is extremely important to protect your loved ones’ financial interests when you plan your estate. You want to ensure that your family, especially minors, will be well looked after. The purpose of a testamentary trust is to protect the interest of your dependants when as minors they are unable to do so themselves. A trust can own property, receive donations and inherit money from your estate when you die. What makes a trust so secure is that decisions relating to it are made by trustees personally appointed by the testator when he or she creates the trust.
In terms of South African law, you can leave your assets to whomever you choose. If, for example, you wish to bequeath a share of your estate to a child but you intend that child only to receive this inheritance when he or she reaches a certain age, then you can provide in your will that the inheritance will be managed in the interim on the child’s behalf by a suitably qualified and responsible person or persons – the trustee/s.
It is crucial to appoint the right trustees. You have to be confident that the trustees will always act in the best interest of the beneficiaries and manage the trust in accordance with the Trust Property Control Act 57 of 1988. Your will can define the terms and conditions on which the trust will operate and the decision-making power of the trustees. You should ensure that the trust’s administration is at all times transparent.
This form of estate planning gives you control over your inheritance and allows you to ensure that it is used in the best interest of your minor dependants. It is important to note that the law does protect the rights of minors. A parent is obliged by law to provide for the maintenance of his or her dependent children and, if no provision is made for this in the will, a claim can be instituted against the estate by the children concerned.
A testamentary trust is an essential estate-planning tool where minors are involved. Not only does it make the process of administering the fund much easier, it also protects the rights of the minors by providing your trustees with certain rights and obligations in dealing with the assets. Any person (unborn or alive) can be a beneficiary of the trust and there is no limit to the number of minors you can have as beneficiaries. It is therefore important to speak to an attorney who specialises in estate planning to ensure your loved ones are fully protected.
By Kwena Madinginye, LindsayKeller associate