There is not a parent with a vulnerable child who does not worry about what will happen to the child after they die. Securing a financial future for a dependent with special needs is of utmost importance. Once you as parent passes away, how well will the day-to-day needs of your dependent be met?
Dependents who have special needs often require caregiving or specialised equipment or medical assistance or they may need to be accommodated in a facility for special needs individuals, which requires financial provision for the duration of their lifetime.
A life insurance policy ceded to the dependent is a good plan, but how does one ensure that these funds are managed in a way that the parent can be sure it takes care of the needs of their dependent for their lifetime?
An unfortunate reality is that a nominated guardian might mismanage or squander the funds intended for the person who has special needs, leaving them with little or nothing to survive on.
According to South African law, an inheritance cannot be paid to minor children. This means that, in the absence of a provider or testamentary trust or any other specific testamentary provision, assets left to minor children will be sold, and either placed in the Guardian’s Fund, which falls under the administration of the Master of the High Court, or in an account in the name of the child’s legal guardian. The funds in the Guardian’s Fund are not easily accessible, and the process can frustrate a guardian who is trying to release funds for a beneficiary’s benefit.
THE PROVIDER / TESTAMENTARY TRUST
One way to prevent these problems from occurring is to create a provider trust (also known as a testamentary trust) through a last will and testament. With a Testamentary Trust, the terms are written into your will and only come into existence after your death. Your will therefore forms the basis of the trust document. You can direct how and when funds should be paid. Because this trust is only established on your death, it does not provide any protection for your assets during your lifetime.
WHAT TO CONSIDER WHEN APPOINTING A TRUSTEE?
A trust has at least one trustee, though there is no limit to the number of trustees appointed. The trustee is the person who will decide how the inheritance set aside for your dependent/s will be managed, and how much money should be spent on their care and maintenance until, in the case of minor children, they reach a specific age.
The trustees do not need to be a professional accountant or such, but they should understand the Law of Trust and what a trustee should and should not do.
Although you can nominate the same person to be both trustee and guardian of your family member, this may cause a conflict of interest. It is advisable also to appoint an independent person as one of the trustees; someone committed to the interests of the beneficiaries of the trust.
WHAT ABOUT TAXES?
Upon your death, your assets will still be liable for estate duty, because the testamentary trust only comes into existence after your death. At the time of death, your assets still belong to you and will therefore form part of your estate. This means estate duty (if applicable) will first be subtracted from your estate, before being transferred into the trust.
If a dependent with special needs suffers from any mental illness as defined in the Mental Health Act or any serious disability as defined under the Income Tax Act, the testamentary trust is treated leniently from a tax point of view. This means more of your money goes towards looking after your loved one. To qualify for these tax benefits the disability must make it impossible for the individual to earn money to support themselves or for them to be able to manage their own financial matters.
Your estate may be charged an initial trustee fee by an institution that manages trusts, for the setting up the trust, and an annual fee for trust maintenance may be charged.
The cost of not drawing up a proper will and testament and trust may amount to a lot more e.g. all assets turned into cash and being held in the Guardians Fund, managed by the government.
WHAT IS THE DIFFERENCE BETWEEN A TRUSTEE AND A GUARDIAN?
A guardian is appointed in your will to care for your dependent on a day-to-day basis, including providing a place to live and making sure they are cared for in all respects.
A trustee is appointed to manage the trust’s assets and make sure the beneficiaries’ benefit, such as using income the trust earns to pay boarding fees or medical- and other expenses.
