In South Africa, a Special Trust is a specific type of trust recognized by the South African Revenue Service (SARS) that offers more favorable tax treatment compared to conventional trusts. It’s designed to cater to the unique needs of vulnerable individuals or minor children.
There are two main categories of Special Trusts, each with distinct purposes and requirements:
- Special Trust Type A: This trust is established solely for the benefit of one or more persons who suffer from a permanent mental or physical disability. The disability must be severe enough to prevent them from earning sufficient income for their maintenance or managing their own financial affairs. It can be an inter vivos trust (created during the founder’s lifetime) or a testamentary trust (created through a will upon death). Special Trust Type A enjoys tax rates similar to those of natural persons (on a sliding scale from 18% to 45%), rather than the flat 45% rate applicable to most other trusts. It also qualifies for an annual Capital Gains Tax (CGT) exemption of R40,000 and a primary residence CGT exclusion of R2 million when selling a property.
- Special Trust Type B: This trust is created through a will (i.e. a testamentary trust) specifically to hold assets for the benefit of minor relatives of the deceased. The aim is to manage and protect their inheritance until they reach a specified age (typically 18, but can be later according to the will, though it ceases to be a Type B trust when the youngest beneficiary turns 18 for tax purposes). Like Type A, it is taxed on the same sliding scale as natural persons. However, it does not qualify for the same Capital Gains Tax benefits as a Type A trust.
In essence, a Special Trust provides a structured, legally sound, and tax-efficient way to ensure that vulnerable individuals or minor children are financially cared for and their assets are managed responsibly, according to the founder’s wishes.
When you would need a special trust?
A Special Trust would be particularly needed in the following scenarios:
- Providing for a disabled dependent (Type A): If you have a child or another dependent with a severe, permanent disability who will require lifelong financial support and care, a Special Trust Type A is an invaluable tool. It ensures their financial well-being, protects their inheritance from mismanagement or exploitation, and offers significant tax advantages that can stretch the funds further. This is crucial as they may be unable to manage their own finances or earn an income.
- Protecting inheritance for minor children (Type B): If you have minor children and you wish to ensure that their inheritance is managed responsibly until they are mature enough to handle it themselves. Without a Type B trust, any inheritance bequeathed directly to minors would ordinarily be paid into the Guardian’s Fund, administered by the Master of the High Court. While the Guardian’s Fund serves a purpose, a Type B trust allows you to appoint trustees of your choosing (e.g., trusted family members or professionals) who can manage the funds according to your specific wishes outlined in your will, and potentially invest it more actively for growth, rather than it remaining in the Guardian’s Fund.
The favourable tax treatment of Special Trusts makes them an attractive estate planning tool for those with qualifying beneficiaries. While not primarily for tax avoidance, the lower tax rates can significantly benefit the trust and its beneficiaries over time. Also, by placing assets into a Special Trust, they are legally separated from the founder’s personal estate. This can offer a degree of protection from future creditors or claims against the founder’s personal estate, ensuring the assets are preserved for the intended beneficiaries.
The process and the timeline
The first step is to determine the type of special trust that is appropriate for your needs. A Type A trust can be either an inter vivos (living) trust created during your lifetime or a testamentary trust created in your will, whereas a Type B trust can only be a testamentary trust.
You would need to ensure that the beneficiaries are properly identified. For Type A, detailed medical reports confirming the disability are crucial. For Type B, beneficiaries must be minors and relatives of the donor.
Choose trustworthy individuals to manage the trust assets
Clearly state the reasons for establishing the trust and how the assets should be managed and distributed to the beneficiaries.
The trust deed is the foundational legal document of the trust. It should be meticulously drafted by an experienced attorney specializing in trust law. The trust deed must include, the names of the trustees and beneficiaries; the powers, duties, and responsibilities of the trustees; provisions for the appointment, removal, and remuneration of trustees; and rules regarding the management, investment, and distribution of trust assets and income.
The trust must be formally registered with the Master of the High Court in the jurisdiction where the trust will primarily be administered. This involves submitting the Original Trust Deed together with a host of supporting documents to the Master. Once the Master of the High Court is satisfied that all requirements are met, they will issue Letters of Authority to the appointed trustees. This document legally empowers the trustees to act on behalf of the trust.
The cost
The cost to draw up a trust deed and set up a trust in South Africa typically ranges from R7,000 to R30,000, including the drafting of the trust deed, consultation fees, and the Master of the High Court’s registration fee.
Most of the costs are involved in consulting with the attorney so they can advise on the best trust structure for your needs, explaining the implications, and ensuring the trust deed aligns with your objectives, and then actually drafting the trust deed.
A straightforward family trust with standard provisions will generally be less expensive to draft.
Whereas a special trust involving multiple beneficiaries, specific asset protection strategies, intricate distribution clauses, special needs beneficiaries, or business interests will require more detailed drafting and legal advice, leading to higher costs.
