The role of Special Trusts in financial planning

Geraldine Macpherson

A special trust is a trust createdsolelyfor the benefit of a person who suffers from a mental illness (as defined in The Mental Health Act), or, a person who suffers from any serious physical disability. This is known as a Type A Special Trust and has the following requirements:

• The trustees may not have the discretion to pay income or capital to any other person whilst the qualifying beneficiary is still alive.
• A qualifying person must as a result of the physical or mental disability not be able to manage his own financial affairs, or, if over the age of 18, not be able to provide for his own maintenance; and
• The person must be alive on the last day of February of the relevant year of assessment - the trust will not qualify to receive the favourable tax treatment in the year that the qualifying person dies, and it will instead be taxed as a normal trust.
• SARS must approve the trust deed as a Special Trust Type A and will register it accordingly.

Creating a Special Trust in your Will

In 2003, a second category of special trust, Type B, was recognised with the following requirements:

• A trust created in terms of the will of a deceased person,
• Solely for the benefit of trust beneficiaries who are relatives of the deceased,
• And, where the youngest beneficiary has not yet reached the age of 21 years on the last day of February in a year of assessment - the trust will be taxed as a normal trust in the year in which the youngest beneficiary turns 21.
• The trust beneficiaries must all be alive at the date of the death of the deceased - an unborn child may, however, also benefit.
• A relative includes the spouse or anyone related to the deceased or his spouse within the 3rd degree of consanguinity, and includes an adopted child.
• Each year the financial officer will submit the return to SARS confirming that the trust qualifies as a Type B Special Trust and request that it be taxed accordingly.

What are the tax consequences of Special Trusts:

• All the income tax provisions that relate to trusts in general, apply to special trusts as well.
• A special trust is taxed according to the rates applicable to natural persons (18% - 40%).
• Exemptions and rebates applicable to natural persons arenotapplicable to special trusts.
• Section 10A of the Income Tax Act, which allows the capital element of voluntary purchased annuity (VPA) to be exempt from tax, applies to Type A Special Trusts only.
• The following CGT inclusions and exclusions applicable to individuals, also apply to special trusts:
  • The annual exclusion of R20 000.
  • Inclusion rate of 25%.
  • R1.5 million primary residence exclusion, and R2 million exclusion.
  • Personal use assets excluded.
  • Compensation for personal injury, illness or defamation of the trust beneficiary.
  • On the death of the trust beneficiary, for CGT purposes only, the status of the trust as a special trust is preserved until the earlier of the disposal of all the assets held by the trust or two years after the date of death of the beneficiary.

The marketing opportunities created with a Special Trust

Children with mental or physical disabilities need special care which can be provided either at home with specialised care-givers or at specialised institutions, both of which come at considerable costs. Should the parents pre-decease their special needs children, who will bear the financial burden for their child’s special needs? A policy on the lives of the parents either owned by the trust, or, owned by the parent with the trust as beneficiary can satisfy this need, alleviating the burden on surviving family members, also giving peace of mind to specialised institutions that fees will be provided for.

The use of a testamentary trust for minors is a must in every estate plan – particularly on the simultaneous death of both parents, or if the parents are divorced - on the death of either of the parents. There are benefits in providing for separate trusts for the children and the surviving spouse. Where the trust established for the surviving spouse is solely for the spouse’s benefit (with no discretion for the trustees to pay a third party during the spouse’s lifetime) then the assets transferred to that trust will still qualify for the section 4(q) deduction in the deceased spouse’s estate. The children’s trust will qualify for the favourable tax treatment as a Type B Special Trust, up until such time as the youngest child reaches the age of 21 (even though the general age of majority has been amended to age 18). Life assurance policies on the lives of the parents, payable to the testamentary trust to be established for the benefit of the minor children, can provide for the needs of the children as beneficiaries of the trust, creating financial stability and peace of mind.