To trust or not to trust

By Alex Simeonides, CEO of Capital Legacy

It is a global misconception that trusts are only for the rich, and the benefits of a trust are only enjoyed by “trust fund babies.” This misconception is perpetuated by misinformation and often ignorance.

Testamentary trusts are trusts that you create through your will and, when properly set up, provide financial reserve, asset protection, and security for beneficiaries, until the beneficiaries are in. able to effectively manage their inheritance on their own.

This means that they allow “financial guardianship” for your beneficiaries, much like a guardian who will take care of your children. At Capital Legacy, we have consolidated these trusts into purpose-defined trusts that can meet the unique needs of beneficiaries.

What is a testamentary trust?

A testamentary trust is simply a trust that is established in accordance with the will of a deceased person in their valid will. In other words, it is provided for in your will but does not take effect until your death. There are certain tax exemptions that can be applied to the trust depending on its specific purpose.

This ensures that the inheritance, left to minor children or beneficiaries unable to manage their own affairs, is well managed and for their benefit. In the case of minors and people unable to manage their own finances, if there is no trust in place, their inheritances go to the Government Guardian Fund, which, though altruistic in its purpose, has been the victim of fraud and maladministration.

Alex Simeonides, CEO of Capital Legacy

A testamentary trust is currently the only regulated alternative to the Guardian’s Fund. However, it is very important to note that the fees of the trustee can be exorbitant, especially when you consider the value of the capital placed in the trust, the accumulated income and the number of years that the trust must be active.

Before making a decision, it is probably best that you first speak with a will drafting specialist who can advise you on the various aspects you need to consider, as your will becomes the trust deed for the testamentary trust. , and it should be considered valid by the Master of the High Court when administering your estate. It would be detrimental to your beneficiaries if your will were declared invalid and their inheritances then paid into the Government Guardian Fund and your estate administered in accordance with the laws of intestate succession.

Second, you need to consult a professional financial advisor to make sure that the goal of the testamentary trust is financially planned. There is no sense in providing a testamentary trust, but then the trust runs out of financial resources before the end of the trust term and cannot fulfill its purpose. Sadly, this is a situation that we as a fiduciary company have had to navigate too often.

At Capital Legacy, we make sure we understand our clients’ wishes for their loved ones and provide trusted solutions that have a very clear goal, to be achieved according to their wishes. These targeted trusts meet the unique needs of beneficiaries with methods that work and are easy to set up.

Three goal-oriented trusts that we use frequently:

1. Legacy Childrens Trust ™

When you provide a children’s trust through your will, it will be created for minor children (who are under the age of 18) at the time of your death and will last until they are 18 or reach the age of 18. age specified in your Will. Minor children cannot inherit directly, and thus creating a testamentary trust ensures that their inheritance will not be left in the hands of Guardians or Guardians’ Fund, and that any property they may inherit can be rented or sold. A children’s trust is classified as a Type B testamentary trust that enjoys certain tax benefits by SARS.

2. Legacy Widows Trust ™

A widow’s trust is established to protect the inheritance of your spouse or partner by ensuring that the estate left to them is not wasted or mismanaged by others, and that your spouse or partner is provided for until his death. In addition, this structure ensures that your children or other beneficiaries also benefit from your estate when your spouse or partner one day dies, thus creating a generational legacy. The purpose of this trust is often overlooked due to the supposed tax implications, but this specific trust does not attract inheritance tax or capital gains tax which, as an estate planning tool, can help. save millions in life insurance and taxes.

3. Legacy Providers Trust ™

A supplier trust is established to provide the continued financial support of a person who needs financial assistance if they are unable to support themselves or manage their own finances. Parents of children with special needs such as cerebral palsy or autism often use this structure in their wills to ensure their children are taken care of, even at an advanced age. A supplier trust will only be classified as a Type A testamentary trust, which enjoys very favorable tax benefits, if the beneficiary has been diagnosed with a mental disorder as provided for in Mental Health Care Act 17 of 2002 or a severe physical disability that prevents them from earning an income or managing their own affairs.

Tax benefits and implications of trusts

When a testamentary trust is classified as Type A or Type B, certain tax advantages apply which naturally benefit the beneficiaries of the trust. It is important to remember that a trust is not a tax avoidance tool; tax still applies, but it may be more beneficial within a testamentary trust structure established by your will.

The role of the executor and the trustees with respect to a trust

It is important to recognize that although a testamentary trust is set up in accordance with the provisions of a will, the executor of the deceased’s estate plays a role in the trust itself. The executor is responsible for ensuring that the wishes of a deceased person are carried out to the extent possible, but they are not necessarily the ones who will administer the trust, unless you have provided for it in your will.

In South Africa, the Trust Property Control Act No 57 of 1988, together with the Trust Deed, governs the actions and decisions made by trustees. So the provisions you make in your will should include how the trust should be established, when it should be terminated, and what the functions of the trustees and their limitations are.

In our wills, we default to a testamentary trust in the will in case one of the beneficiaries or their descendants are under the age of 18, however, we also expect the executor and trustees to use their discretion in determining whether setting up a testamentary trust is financially viable at the time.

It is important that the trustees who are appointed to the trust you create remain objective and ensure that every decision they make is in the best interests of the beneficiary. It is for this reason that we often encourage our clients to appoint both a personal trustee and a professional trustee who remains independent.

Operating costs of a testamentary trust

When establishing a trust, certain services may be charged by the trustees, such as:

  • Initial trust establishment costs;
  • Annual fiduciary fees for capital management; and
  • Fees as a percentage of the income received by the trust.

In addition to these fees, the trust must have annual financial statements that incur accounting fees, and income tax rules apply to income received by the trust.

Sometimes these fees seem prohibitive and people end up avoiding a trust structure even though this may be the best solution for their needs, especially when underage children are involved. Capital Legacy’s Legacy Protection Plan ™ is a one-stop solution that covers the costs of creating and managing a trust, as well as other legal costs associated with executing an estate, such as executor fees. and transfer.

By combining sound fiduciary advice and sound financial advice, you can provide your beneficiaries, especially the young and the most vulnerable, with certainty when you are no longer there. A trust can be an effective vehicle for the everyday man and should not be misinterpreted as something that is only used by the rich and famous.

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To trust or not to trust

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