Should you consider a testamentary trust?



The introduction of tax on interest-free loans to trusts has seen inter vivos trusts fall out of favour with a shift towards using testamentary trusts instead, according to Willie Fourie, Head of Estate and Trust Services at PSG Wealth.

“The trend has been to set up inter vivos trusts and to transfer ownership of assets to these to peg investment growth for estate duty purposes. Benefits like the protection of the assets in trust are limited if the assets are transferred to the trust and a loan account is granted for the value of the assets. This loan account remains an asset in the estate of the trust owner. The tax introduction, however, has reduced the benefits significantly.”

For some, a testamentary trust could be a considerably more effective estate planning tool, which Fourie feels is much neglected despite that it can achieve most of the normal estate planning goals like safeguarding the future of family members, minimising a tax burden or planning for the incapacity of elderly persons or children with disabilities. So, should you consider it for your own estate planning?

Consider your minor beneficiaries

Interestingly, most wills make provision for the creation of a testamentary trust to hold the inheritance of minor children until they reach majority age (currently 18). This provision prevents the minor’s inheritance being paid to a guardian under control of the Master of the High Court. “In this case, the trust has limited use as it usually terminates once the minor beneficiary turns 18 and the assets are transferred into their name”, Fourie adds. Beneficiaries of this type of trust have vested rights to the income and the capital of the trust, meaning the trust merely serves as a vehicle to administer the assets on behalf of the beneficiary.

“Testamentary trusts allow trustees to use their discretion as circumstances change, but I believe they should be more than that,” Fourie says, because the rights of beneficiaries can be contingent on the trustees exercising their discretion in favour of a beneficiary, depending on the circumstances at the time.

“The discretionary nature of the trust means that the ownership and benefit of assets can effectively be withheld, subject to the trustees’ discretion to determine when and in what proportions a beneficiary will benefit.”

Testamentary trusts and elderly parents

The mental health of an elderly parent is one of the biggest concerns for children, who often have to deal with the trauma of mentally debilitating diseases like dementia. While an elderly parent is mentally able to understand the nature of their actions, they can grant a power of attorney to a child, or another person, to deal with their financial affairs.

However, a problem arises when the elderly parent loses that mental capacity to understand the nature of their actions. In this case, Fourie says the power of attorney becomes null and void and the High Court of South Africa will have to appoint a curator to the estate of the mentally handicapped person. “South African law does not permit an enduring power of attorney, which would allow children to continue to manage their mentally disabled parent’s financial affairs.”

Address concerns about power of attorney

A testamentary trust can be set up in the estate of a spouse for the benefit of the surviving spouse. This will ensure that the trustees have full control over the assets of a parent without the associated problems with outdated or illegal powers of attorney. In addition, Fourie notes that the estate duty benefit of a bequest to a surviving spouse need not be forfeited when using a testamentary trust, provided it is worded correctly.

Facilitate estate planning for multiple generations

This type of trust can also continue for the benefit of children and grandchildren after the death of the surviving spouse. All the associated benefits of the testamentary trust, including pegging the growth of assets in trust, protecting it against claims of creditors and even against the spending habits of the beneficiaries themselves, remain in force.

“A fiduciary adviser can assist and best maximise the benefits of incorporating a testamentary trust into your estate plan, negating concerns about managing assets for future generations,” Fourie concludes.