A Testamentary Trust is one which is formed as a result of an instruction in your will. The Trust Deed of the Testamentary Trust is therefore your will, and you need to ensure that your instructions to your Trustee are therefore clear and unambiguous.
The predominant reason for a Testamentary Trust could be your desire to ensure that the capital which will be invested in the Trust, eventually flows back to your family.
Examples of Testamentary Trusts are:
- Your child is disabled, either mentally or physically.
He or she needs care and is either in a home or has a full time carer. The instructions in your will are clear – monthly costs, including medical aid subscription have to be paid from the capital invested in the Trust. At his or her death, the capital reverts to the other siblings, or members of your family – as per instructions in your will.
- You want to provide for your elderly parents, or parents-in-law.
The instructions in your will can include that they are paid a monthly income which escalates with inflation each year; that any exceptional medical expenses are paid, and that the Trustee of the Trust has discretion regarding any other expenses which they may wish to claim.
At their death, the capital reverts to your spouse or children.
- You want to provide for your elderly sister (or brother).
The instructions in your will allows for a monthly income to be paid to her, escalating with inflation. No other lump sums to be condoned. At her death, the capital reverts to your other siblings.
- You want to provide for your spouse.
You love him or her dearly, but she or he is very easily persuaded to part with money, either to your children or his or her favourite charity. A regular income is paid, escalating at inflation, and any medical or exceptional expenses, including the cost of maintaining a primary residence, are paid from the Trust. At his or her death, the money reverts to your grandchildren to cover their studies. The will needs to indicate precisely what expenses related to studying will be covered and at what age (25 or 30 perhaps?) the capital in the Trust can be paid out to them as a lump sum.
- You want to provide for several charities.
Your wish might be to pay out a fixed amount on an annual basis, escalating with inflation annually. Your will has to be very clear regarding the Trustee’s duties as to determining how the money is applied. And can the Trustee decide whether a charity will not be paid if the money has been applied in a frivolous, wasteful manner?
- You want to provide for your child(ren).
The capital sum is too large to pay out in a lump sum; the partner of your child is a spendthrift; you are concerned about your child’s lifestyle and that when he or she (they) reach retirement, there will be no funds available for them to live comfortably. Your will must contain very clear guidelines as to how much is paid monthly, annually or at irregular periods to your child. Which expenses are covered and which not? Can the capital at a certain age be paid out in full, rather than remain in the Testamentary Trust? If he or she dies, what happens to the capital then?
Decisions you need to make include whether you:
- appoint one or two Trustees
- what the fees are which Trustees will be paid
- appoint another family member, with the potential for conflict, as a Trustee
- can you, above all, trust that your wishes are carried out?
As a tool for Estate Planning a Testamentary Trust fulfils a practical and sensible function. It is, however, an aspect which needs very careful and thoughtful discussion with your financial advisor – who after all has, as a function of his or her duties, the responsibility of being your soundboard and providing guidance and advice.
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