Rory McFarlane of Durban attorneys Shepstone and Wylie explains the advantages of a testementary trust in this the fourth part of his series on Estate Planning.
You do not have to form a trust before you die it is possible and extremely practical to form a trust in your will.
This type of trust, known as a testamentary trust, has a number of advantages including protection, after death, of your assets from creditors, in-laws with suspect motives and even from the beneficiaries themselves.
The creation of a trust in your will does not restrict your right to deal with your assets while you are still alive. The trust only comes into operation after you die. This means that you retain control of your assets while you are alive and can adjust your will at any time to make provision for changes in family circumstances.
Some of the reasons for creating a testamentary trust are:
* If your children and a spouse are likely to survive you, you need to ensure that your spouse will be financially secure after you have died, that the needs of your children are catered for and that your assets will pass, as far as possible, intact to the next generation. A testamentary trust, that gives trustees the discretion to use income and/or capital for your spouse and children's maintenance, education and general benefit, is the ideal vehicle.
* A testamentary trust can also be used to protect the interests of minors. Any direct bequest in your will to your minor children could create problems. In the absence of a trust, cash from an estate must be paid to the Guardian's Fund (which is controlled by the Master of the High Court), where it is held until the minor turns 21, unless the minor's surviving guardian can lodge security to apply for the release of the capital. The Guardian's Fund offers security for a minor's inheritance, but can be very restrictive. The interest rate offered by the fund is often lower than market-related rates, the money is not easily accessible for maintenance and the Master of the High Court generally does not enjoy the flexibility which a trustee should have.
If you leave moveable or immovable property to a minor in your will, serious consequences which you may not have contemplated, could also arise. Ensure that the person responsible for drawing up your will advises you fully on these issues;
* A testamentary trust can be used to protect assets which you intend to leave to a person who is, or is likely to be, married in community of property. This is particularly important in the light of a recent judgment in our courts which states that a clause purporting to exclude a bequest in a will from the joint estate of a beneficiary married in community of property may be ineffective against creditors of an insolvent joint estate;
* Immovable property bequeathed to a testamentary trust will be exempt from transfer duty. This saving may prove to be more attractive than the estate duty saving to be gained by transferring the property to a trust during your lifetime;
* Whatever you leave to your spouse is exempt from estate duty, but it will be taxed on his/her death if that estate exceeds R1 million. It makes more sense to bequeath up to R1 million, which will enjoy exemption, to a testamentary trust for the benefit of your spouse and children. That way the family eventually enjoys a double exemption; and
* A farmer wanting to leave his farm to more than one person is prohibited from doing so in terms of current legislation. However, by leaving it to a testamentary trust, a farmer can appoint more than one beneficiary to use the trust property.
There are many advantages of making provision in your will for a testamentary trust. Remember that only you, as the testator of the will, can really assess the extent to which your assets will need protection after you die. Once you have identified this need, it is advisable to keep the protection to a minimum and leave as much as possible to the discretion of the trustee.
Your trustee, whether a family member, friend or professional person (or any combination of these) should be chosen carefully. Your trustee will need wide investment powers and the discretion to advance or postpone payments to your beneficiaries. If you are in any doubt about granting these wide powers it probably means you've chosen the wrong trustee.