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Category Life Insurance

Protect your heir’s interests with a testamentary trust

14 June 2017 Adv. Ronald King, PSG Wealth
Adv. Ronald King, Head: Strategic Research & Support at PSG Wealth.

Adv. Ronald King, Head: Strategic Research & Support at PSG Wealth.

A paragraph or two in your will is not always enough to ensure your wishes are fulfilled after you’ve died. To protect the inheritance and financial wellbeing of your child or spouse, you might need to consider a testamentary trust.

When it comes to planning your estate, one of the biggest fears a parent can have is that their child’s inheritance is wasted by a spouse. The same counts for married persons who fear the long-term safety of the capital they leave behind in the event of their spouse getting remarried.

To prevent such issues, a certain set of standard words are normally used in the body of the will:

“The bequest to my spouse will be excluded from any joint estate or from any accrual claim or from the matrimonial powers of the spouse.”

Unfortunately, this is insufficient to protect your loved-ones’ financial stability.

There are factors beyond your control

Where spouses are married in community of property, the day to day expenses and incomes of both spouses fall within the bounds of the joint estate. Bequests subject to the above-mentioned paragraph, however, fall under the heir’s own estate. People who are married within community of property can therefore have two estates, the joint as well as their own. While a spouse will have access to their own estate and the joint-estate, they will have no access to their spouse’s separate estate. There are, however, a few aspects that are not covered by the above mentioned standard paragraph, some with dire consequences.

The first is the influence of the spouse that could be exerted on your heir to willingly make the money accessible, by placing the capital in a joint account or even simply sponsoring their activities or standing surety therefor.

The second is more important and much scarier. Although a spouse does not have access to their spouse’s separate estate, that’s not the case with their debtors. In a marriage in community of property, one spouse’s debtors become both spouses’ joint debtors. That means, should your heir marry someone with large debts, the new spouse’s debtors will also become the heir’s debtors. As such, debtors can claim from your heir’s separate estate.

There is no wording to add into a will to counteract this.

Even if spouses are married out of community of property, in the case of the insolvency of either spouse, all assets are repossessed to service the debt. The ‘innocent’ spouse must then prove that the asset wasn’t purchased with communal money. In the case of bequests, however, this shouldn’t be too difficult to prove.

Using a testamentary trust

The only way to truly protect the assets is by using a testamentary trust. In these cases, the will dictates that all assets are to be kept in a trust for the benefit of the heir. If the trust is managed by a professional trustee, you can rest assured that the money will be used as you intended until the moment the trust ends – a date that can be determined in the will.

Another benefit of using a trust is the strict financial discipline it instils. If you fear that your heir lacks the necessary knowledge and know-how to be able to run their own finances effectively, a well-run trust will put your heart at ease.

Testamentary trusts also have a much better tax positioning than normal trusts. If the youngest beneficiary of a trust is below 18 years old, the trust will not be taxed at 45% like other trusts, but rather on the normal sliding scales. Additionally, there are no article 7C donations tax issues or the risk of having to pay estate duties.

If you want to protect the value of the legacy you leave behind for your spouse or child, consider a testamentary trust. Don’t place all your hope on one paragraph in your will.

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