Why special trusts are so special

Michelle Human: Legal Marketing Consultant at Liberty Life

A special trust forms a vital part of any estate plan. Special trusts are used to take care of people who are not able to manage their own finances. These trusts are therefore the ideal vehicle for disabled or mentally handicapped people who are unlike

Tax advantage

The income of a special trust is taxed at the rate applicable to individuals, which can be significantly lower than the tax rate applied to an ordinary trust (40%).

Capital gains tax is also lower within a special trust at a maximum rate of 13.3% compared to 26.7% for ordinary trusts.

Simple and effective

A special trust is an effective way of providing for the financial future and well-being of minor children and can be created very simply by including it as a clause in your will. The trust will therefore only come into existence when you pass away.

You need to specify that you are creating a trust for the benefit of your minor children. Although you don’t have to, it’s a good idea to stipulate that it is a special trust.

A trust is really only as effective as the trust deed which is the document defining the trust. You need to make sure that your trust deed is drafted by an expert attorney specialising in this field.

What to include:

The clauses of the will regulate how the trust will operate and cater for issues such as:

Who the beneficiaries and trustees are

You need to specify your children as beneficiaries. You also need to select trustees who will manage the funds on behalf of your children (not necessarily their elected guardian/s).

How capital is to be invested

When drawing up your will you need to decide which assets the trust will acquire. You can leave R3.5million to the trust without paying estate duty. Although you are able to leave your entire estate to your spouse without incurring estate duty, by allocating a portion of your estate for your children in a special trust you can provide for your children separately and secure their inheritance.

A certain amount of liquidity will be required to meet the income needs of the beneficiaries and this is where the role of life cover should not be under estimated.The trust can own a life policy on your life which will pay out when you pass away.

How the trust is to be managed

In your will you need to stipulate the amount of income and capital to which beneficiaries are entitled and under which circumstances additional monies may be paid out. For example, the children would be entitled to a certain amount of income a year and additional funds may be paid out for their education.

Providing for disabled dependants
Special trusts to provide for handicapped children can be created during your lifetime and do not then form part of your will. This type of trust is registered with SARS as a special trust and the same provisions as described above will apply.