A testamentary trust is a type of trust that is created under the terms of a person’s will and comes into effect after the person’s death. In South Africa, a testamentary trust is a legal arrangement in which a person’s assets are placed into a trust for the benefit of their heirs or beneficiaries.
The purpose of a testamentary trust is to protect the assets of the deceased person from being misused or squandered by the beneficiaries. The trustee, who is appointed by the deceased person in their will, is responsible for managing the trust assets and distributing them to the beneficiaries under the terms of the trust.
A testamentary trust can be used to achieve a variety of goals, such as providing for minor children or beneficiaries who are not capable of managing their finances, protecting assets from creditors, or ensuring that assets are used for a specific purpose, such as education or medical expenses.
A testamentary trust can also be used to house assets for beneficiaries who are mentally or physically disabled and who are incapable of managing their affairs. If you have a child who suffers from a permanent mental or physical disability, you can bequeath any assets intended for that child to your testamentary trust where your nominated trustees will administer the trust assets for the benefit of your special needs child.
One of the key benefits of a testamentary trust in South Africa is that it can provide tax benefits for the beneficiaries. For example, if the trust is set up to provide for the education of a beneficiary, any income earned by the trust for that purpose is exempt from tax.
Setting up a testamentary trust
It is important to note that setting up a testamentary trust can be complex and requires careful consideration of various factors, such as the type of assets being placed in the trust, the beneficiaries, and the tax implications. It’s important to work with an experienced attorney or financial advisor who can guide you in setting up a testamentary trust that meets your specific needs and goals.
In the case of a testamentary trust, the deceased’s last will serves as the trust document. It will make specific provisions for the formation of a testamentary trust in the event of their passing. Your will must include the names and ID numbers of the trustees you have nominated, the duties and powers of the trustees, the names of the trust beneficiaries, as well as the objectives of the trust. In setting up your testamentary trust, you effectively ensure that should you die, specific assets will become assets in the trust which must be administered for, and in the best interests of, your beneficiaries.
On the passing of the testator, one must lodge certain documents with the Master of the High Court to appoint the nominated trustee:
- Application form (J401)
- Completed Acceptance of Trusteeship (J417) and Acceptance of Auditor Application (J405) forms.
- Beneficiary Declaration (J450)
For the testamentary trust, the completed acceptance of trusteeship and a copy of the trustee’s ID document by each trustee and all the requirements listed on form JM21 must be lodged.
On receipt of all the required documents, the Master issues the nominated trustees with letters of authority to administer the trust.
Note: no trustee may act as such without the written authority of the Master.
Statutory and common law duties of trustees
You must give careful thought to those you intend to nominate as trustees as you will effectively be entrusting them with enormous responsibility – keeping in mind that you will no longer be around when their mandate becomes effective. All trustees are bound by a set of fiduciary, common law, and statutory law duties, and it is important that they fully understand what they are signing up for.
There are several pieces of legislation by which your trustees will be governed, including the Income Tax Act, the Trust Property Control Act, and the Tax Administration Act. Most importantly, your trustees are duty-bound to act at all times in the best interests of your beneficiaries and to treat your beneficiaries impartially. All trustees are required to actively participate in the management of the trust, to avoid conflicts of interest, and ensure that the tax affairs of the trust are kept up to date.
Although your trustees can outsource some of their functions, such as bookkeeping and accounting, they remain personally liable for the sound management of the trust’s affairs. Importantly, your trustees have a fiduciary duty which means that they will be held to a greater standard of care, equivalent to that of a company director. A crucial difference, however, is that your trustees owe their fiduciary duty to the beneficiaries, whereas company directors owe their fiduciary duty to the company and not the shareholders.
The powers of the trustees
The powers of your trustees will need to be set out in your will, with the first function being to take control of the trust assets. Where the asset is an immovable property, your trustees must ensure that the property is registered in the name of the trust and obtain the title deed for the property. Similarly, in the case of investments, they must ensure that the investments reflect in the name of the trust. Your trustees will have the power to make investments on behalf of the trust, take out insurance, provide maintenance to your minor or disabled children, and remunerate professional trustees that have been appointed, amongst other powers.
Trustees are responsible for keeping accurate accounting records which must be made available to the Master if requested. Trustees also have to attend to all statutory filing such as tax returns, VAT returns and PAYE. Trusts are registered as provisional taxpayers and are therefore subject to provisional tax which is usually payable as per the provisional tax period intervals. Their tax year runs from March to the end of February each year. They are also required to ensure that trustee meetings take place following the trust deed, and that accurate minutes of all meetings are kept. If the trust deed requires that the trust be audited, the trustees are responsible for ensuring that annual financial statements are timeously prepared.
Because a trust is not recognised as a legal person in South Africa, it cannot be sued, although the trustees can be sued in their official capacity for any negligent or intentional wrongdoing. You cannot include a clause in your trust deed which indemnifies your trustees from liability, meaning your trustees will remain jointly and severally liable for their actions to the extent that the trust suffers damages.
Unlike an inter vivos trust, which is a contract, which the contracting parties (the founder, the trustees and potentially the beneficiaries) can amend in terms of our law, the trustees cannot amend the trust instrument of a testamentary trust on their own, as one of the contracting parties – the founder – is no longer around.
A Court can, generally speaking, also not vary the terms of a testamentary trust. Section 13 of the Trust Property Control Act, however, allows a trustee or any other interested person (beneficiary) to apply to Court to have a testamentary trust amended in specific circumstances.