Parents are often concerned about what would happen to their children should they die before the children reach adulthood, or even after adulthood in some instances. They want to ensure that their assets, including their family home and investments, are protected and used responsibly to maintain and support the educational and general needs of their minor children until they reach a certain age. As a parent, you might have heard of a testamentary trust that can be included in a Will, but you are not sure how to go about it. This article will explore what a testamentary trust is, discuss a bit of the advantages and disadvantages of having this type of trust, as well as touch on the legal obligations for testamentary trusts. For more information on trusts in general, click here.

 

What is a testamentary trust?

  • A testamentary trust (also known as a trust mortis causa) is a type of trust that is provided for in a person’s Will, but only comes into effect at the death of that person (known as the testator). Seeing as the terms and conditions of this type of trust are set out in a Will, it means that all the requirements of a valid Will must be complied with. 

  • Although there are many reasons to create a testamentary trust, it is usually created to protect the interests of the testator’s minor children after the death of the testator.  

  • For example, a testator can stipulate in a Will that a certain amount of money or the entire estate must go to the testamentary trust with instructions to the nominated trustees to take control of and administer the said assets for the benefit of the minor children, namely the beneficiaries.

  • Testamentary trusts can get complicated and it is strongly advised that legal advice be obtained when including same in a Will. 

 

What is the purpose of a testamentary trust?

  • The primary purpose of a testamentary trust is to manage and protect all the assets and funds that have been placed into the trust for the benefit of the beneficiaries.

  • A testator may have various reasons for creating a testamentary trust, such as to ensure that the financial needs of a minor child or disabled person that are unable to manage their own finances are managed to their best interests.

  • The trust terms and conditions may indicate how the funds and assets must be managed, for example, to indicate that the trust must specifically used for the maintenance, education needs and overall well-being of the beneficiaries for a specified period of time.

  • Normally, a testamentary trust will be in effect for a certain period of time or until the happening of a future event, such as a minor child reaching the age of majority or a specific age. 

 

What are the roles of trustees in a testamentary trust?

  • Trustees are the people nominated by the testator in the Will or appointed by the Master of the High Court to manage and administrate the trust in the best interests of the beneficiaries. They fulfil a very important position as they will be in control of the trust and may be held responsible should anything go wrong. 

  • They have a fiduciary duty to the beneficiaries, which means that they have to act in good faith, with care, diligence and skill in the management of the trust.

  • Depending on the terms and conditions set out in the Will, trustees can have the power to invest the assets in the trust for the benefit of the beneficiaries, make decisions on how to distribute the funds or income of the trust and so on.  

  • Trustees need to keep the beneficiaries informed on all decisions and transactions conducted on behalf of the trust. They also need to comply with all the legal obligations, such as filing tax returns on behalf of the trust and comply with the provisions contained in the Trust Property Act 57 of 1988.

 

What are some of the advantages and disadvantages of a testamentary trust?

  • One of the main advantages of a testamentary trust is the protection of assets and funds for the benefit of the beneficiaries. In essence, the testator continues to have some form of control over how the assets in the trust should be dealt with after passing away. 

  • A testamentary trust serves as a vehicle of continuity as it is established only at the death of the testator and it can offer long-term financial security for the beneficiaries

  • On the other hand, because it is only established at the death of the testator, the testator must make sure that the Will providing for the testamentary trust is reviewed on a regular basis to ensure alignment with any new developments in the testator’s life. 

  • The testator must also keep the costs implications in mind for setting up and administering trust at and after the death of the testator. Trustees are allowed to and usually charge fees for managing and administrating trusts.

  • Although the trust is for the beneficiaries, it does not mean that they will have immediate access to the funds or assets. The beneficiaries will experience a delay in accessing funds and assets and must often request the trustees for any unplanned funds they might need.

 

A testamentary trust is an estate planning tool available in South Africa. It offers protection of assets and funds for the benefit of the beneficiaries. However, setting up and managing a trust may be a complex and daunting task, and one needs to carefully consider the costs and effects of this this type of trust.

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