The role of Special Trusts in financial planning

A special trust is a trust created solely for 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 are not applicable 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.

15 September 2011

Disclaimer
Any legal, technical or product information contained on this webpage or document is subject to change from time to time and is not to be construed as advice by Liberty Life. Any recommendations made must take into consideration your clients’ specific needs and personal circumstances. This webpage and document(s) is a summary of the changes to the features of the product. If there are any discrepancies between this document and the contractual terms, the latter will prevail.

Estate Implications of Fixed Property

Practical implications of unforeseen costs:

Where the deceased had fixed property/properties in his estate, the cost of bequeathing these can be very high. Unforeseen and unplanned costs of bequeathing can have the detrimental effect that the estate or the beneficiaries might be forced to sell assets to cover these costs. In extreme circumstance it might result in the sale of the very asset bequeathed, thus defying the purpose of the deceased’s last wish. This, however, can be avoided with proper and timeous planning.

Options available to clients and cost thereof:

Where a client has immovable properties, for example, the following three options will be available, with the respective cost implications:

	Option A Properties bequeathed to trust in will, at death of owner	Option B Properties are transferred to a trust, while owner is still alive	Option C Properties bequeathed to spouse at owner’s death
Estate Duty	20%	None if no loan outstanding or 20% on outstanding loan account	None, section 4(q) Estate duty liability postponed until death of the spouse
Executor’s Fees	3,5% plus VAT	None	3,5% plus VAT
CGT	10% approximately	10% approximately	None (Rolled Over) Postponed until death of spouse
Transfer Fees (on or after 23 February 2011)	None	R 0 – R 600 000: 0% R 600 000 – R1 000 000: 3% of the value above R 600 000 R1 000 001 to R1 500 000:  R12 000 plus 5 % of the value above R1 000 000 R1 500 001 and above:  R37 000 plus 8% of the value exceeding R1 500 000	None
Total Costs	33,5%	10% plus estate duty on loan account and transfer fees	3.5% but estate duty and CGT postponed

Option A appears to be expensive, so how can this problem be solved? In taking out a whole life policy all the liquidity requirements, including CGT, estate duty, executor’s fees and the liabilities of the estate can be taken care of.

No additional benefits should be added on this policy, only life cover, as the intention is only to cover costs and liabilities upon the death of the planner and at no other time. The beneficiary on this policy should be the estate to ensure that the executor has sufficient cash to settle all costs. As the policy can lead to additional executor’s fees and estate duty, provision should be made for this by increasing the sum insured accordingly (divide by 0.76808).

Although this option may appear to be expensive it may in fact be the cheapest option if the costs are financed through life cover.

Option B this option might appear to be a cheaper option but bear in mind that CGT needs to be paid on the transfer of the assets into the trust which may have a serious impact on the planner’s cash flow. In practice, often the cash is not readily available for the planner to exercise this option. The advantage of this option is that the planner limits or caps the growth of the asset in his personal estate.

Option C might seem like the least expensive route to take, but take note that it is only the least expensive at the time of the death of owner. At the death of the surviving spouse estate duty, CGT and executor’s fees are payable and that for purposes of CGT specifically, the base cost will be that which would have applied on the death of the first spouse. This option is preferred where the planner does not have the capital available for option A or B and/or where the planner is not insurable. Usually it can be recommended that life cover be taken out on the life of the spouse to cover all the above mentioned costs.

(Note: An individual’s primary residence would be exempt up to the value of R2 000 000.00. A gain of R1 500 000 will be exempt if the value is more than R2 000 000.00)

Conclusion

Make sure your clients are aware of the full consequences of costs of bequeathing fixed assets and choose the best option suited to their personal circumstances. Instead of being driven by the costs involved, make certain that the planning is based on the client’s objectives and that the costs are catered for, through life cover, where possible.

Watch out for "hidden" executor fees...

I was referred to a widow, aged 63 today. She has recently lost two loved ones her only Son and her beloved Husband.

If that wasn't bad enough her Husband hadn't updated his will since 1980 and the appointed executor's are no longer in business they are married in C.O.P (Community of Property).

She is the sole beneficiary of husband's estate that consists of the flat, in Gordon's Bay and an annuity that pays R289 p.m

All life policies he had during his life time have been cashed up and he had no investments or cash.

Not knowing what to do she approached the Absa Bank with his outdated will and they happily agreed to help her wind up his estate by appointing themselves as executors of her husband's estate.

They failed however to warn her of the 3.99% executor's fee now payable on her property that will amount to R89 000. The estate has no other assets to dispose of.

She lives off a small pension fund and doesn't have any cash or Investments either to pay the exeutors fees.

The executor has now threatened to start selling her property to recover their fees...

Banks are to happy to draft a will for their clients and they automatically appoint themselves as executor's.

Be careful and consider alternate executors as this can have major consequences to your loved ones if their is no cash in the estate to pay fees.

The property you would like to leave behind could wind up been sold to pay the executor.

If you would like a will or an evaluation of your will contact me...don't put it off.

Life cover can obviously provide liquidity in a an estate, but elderly people often don't have life cover anymore.