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Testamentary trust (mortis causa)
Your testamentary trust is a trust created in terms of your will and comes into effect after your death. Testamentary trusts are the most common trusts in use. They are especially suited to the protection of minors and other dependants who are not able to look after their own affairs.
The trust is administered by trustees appointed in terms of the will, and usually terminates after a predetermined period or at a determined event, e.g. a minor turning 21 or the death of an income beneficiary.
Assets that form part of an estate may be transferred to a testamentary trust.
The trust is formed by placing a trust clause in a will, which serves the same purpose as a trust deed. The testator will appoint the trustees in his will. The appointed trustees apply for a letter of authorisation at the same office of the Master of the High Court as where the estate is registered.
A testamentary trust may be either a discretionary or vested trust.
- Discretionary trust
Payment of income and/or capital is subject to the discretion of the trustees and all non-allocated income is taxable in the hands of the trust. Capital beneficiaries may only be determined at a later stage.
- Vested trust
The income and capital vest in the beneficiaries. Any income is taxable in the hands of the income beneficiary, who may also be the capital beneficiary. A capital beneficiary thus gets immediate property rights, subject to the terms of the will or trust.
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Living trust (inter vivos)
A living or inter vivos trust comes into being during the lifetime of the settlor or founder with the signing and registration of a trust.
A living trust is formed as an arrangement between the founder/settlor and the trustees. The founder/settlor is the person that takes the initiative to create a trust.
The interested parties in a living trust are the founder/settlor, the trustees, the persons or company appointed to take control over the assets and take responsibility for the administration and management thereof; and the beneficiaries or person who, in terms of the trust act, are entitled to the income and/or capital of the trust.
After signature of the trust deed, the trust is registered with the Master of the Supreme Court in whose jurisdiction most of the assets are situated or where the administration is to take place.
A living trust can take several forms:
- Family trust
A trust that comes into being through an agreement between the founder and the trustees. Assets are sold to the trust and a loan account (debt) is created, or assets can be donated, but with donation tax implications.
- Charitable trust
A charitable trust is a particular kind of trust that may be classified as non-taxable in terms of the Income Tax Act. Capital loans are made to a trust. The trust is so structured that it pays no income tax. The trustees then make donations to charities, schools, churches, etc. on your behalf and according to your wishes. Because there is no income tax applicable, you may make large donations.
- Umbrella trust
This is a trust linked to a pension, provident, retirement annuity or preservation fund as well as group schemes. The trustees of the fund/scheme obtain an additional option to, in specific cases, transfer the death benefits to the trust for management to the benefit of the beneficiaries.
- Guardian's trust
These trusts are created as an alternative for monies due to minors that must, under certain circumstances, be paid into the Guardians' Fund of the Master of the Supreme Court. Examples of such monies are proceeds from policies and cash inheritances for which no provision had been made through the setting up of a trust. This trust is authorised to receive, and to manage any benefits accruing to minors from the Guardian's Fund. It is a safe alternative for the Guardian's Fund to pay benefits into the trust rather than to the remaining guardian, who may not necessarily act in the best interest of the child.
- Special trusts
These types of trusts, which are taxed at the same rate as a natural person, may only be created for the benefit of a person suffering from serious mental illness as described in the Mental Illness Act, Nr 18 of 1973, or who suffers from serious physical disability. Testamentary trusts benefiting any living family member, of whom the youngest turns 21 in a tax year, may in certain cases also be classified as a special trust.
Contact an intermediary now for expert advice.
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