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How to set up a trust for your special needs child

Those with special needs can be particularly vulnerable to being taken advantage of and, as a parent, putting structures in place to manage and administer your child’s affairs is paramount.

If you have a child with special needs – whether in the form of a mental or physical disability – which prevents them from managing their own affairs, making provision for their financial future is likely to be a priority for you, especially when you are no longer around.

Those with special needs can be particularly vulnerable to being taken advantage of and, as a parent, putting structures in place to manage and administer your child’s affairs is paramount. Our law recognises this need and, as such, has made provision for parents of such children to create what is known as a Special Trust Type A which is given efficacy by a number of pieces of legislation including the Trust Property Control Act, the Income Tax Act, and the Mental Health Act.

In this article, we provide details on how to set up and register a Special Trust Type A for the benefit of your special needs child.

A Special Trust Type A

A trust is a legal entity that is created to hold assets for the benefit of certain persons which, in this instance, would be your special needs child. As the trust founder, you may transfer assets into the trust by either sale or donation, or on your death in terms of your will. The trustees that you appoint will manage the assets of the trusts in the best interests of your child, and the trust will only cease to exist in the event of your child’s passing. Remember, the sole purpose of such a trust must be to provide for your special needs child, and no other person or beneficiary can stand to benefit from the trust. However, if you have more than one special needs child, you can provide for them all in terms of a single special trust.

Qualifying for a Special Trust Type A

If you’re considering setting up such a trust, it is important to first determine whether your child’s disability meets the qualification criteria. This type of trust must be set up in terms of Section 6B (1) of the Income Tax Act and must be duly registered with Sars in order to qualify for the special tax dispensation afforded to such vehicles. This section of the Act defines disability as a ‘moderate to severe limitation of any person’s ability to function or perform daily activities as a result of a physical, sensory, communication, intellectual or mental impairment’.

In terms of the Mental Health Act, a mental illness refers to a ‘positive diagnosis of a mental health-related illness in terms of accepted diagnostic criteria made by a mental health care practitioner’. Importantly, your child must have suffered from a mental or physical disability for at least 12 months and the condition must be deemed to be permanent. Remember, when setting up the trust, you will be required to submit medical reports from your child’s registered medical practitioners in support of the application.

Choosing between a testamentary or living trust

Before setting up the trust, you will need to consider whether it should take the form of a testamentary or living trust. A living, or inter vivos, trust is set up during your lifetime using a trust deed as the trust instrument whereas a testamentary trust is set up in terms of your will and is only formed in the event of your death. Your personal circumstances and that of your special needs child will largely determine which type of trust is most appropriate for your needs.

If you are in good health, live in close proximity to your special needs child, and are capable of ensuring that your child is adequately cared for, then a testamentary trust would be more appropriate as it is only after your passing that your child would benefit from having trustees manage their affairs. On the other hand, if you have health challenges of your own, live far away from your child, or travel frequently abroad, then it may be worth considering setting up a trust while you are still alive.

For instance, you may have other adult children who you would like to assist you in managing the affairs of your special needs child, in which case an inter vivos trust would be appropriate. That said, you must be prepared for what it means to relinquish full control of the assets transferred into the trust and allow the trustees to administer those assets according to their mandate.

Vested or discretionary trust

You will also need to give thought as to whether your trust will be a vested or discretionary trust. If set up as a vested trust, your special needs child will have a vested right to the trust assets which may not be ideal. On the other hand, forming a discretionary trust means that your trustees will have discretion as to how your child will be paid and how the assets will be dealt with. This may be a more appropriate form of trust bearing in mind that your child’s condition may change and/or deteriorate over time and your trustees will be able to adjust how the assets are managed according to the changing needs of your child. 

Forming the trust

The method of forming the trust will depend on whether you are setting up a testamentary or inter vivos trust. If your will is your trust instrument, the executor of your estate will be responsible for ensuring that the trust is set up following your death. In the case of an inter vivos trust, you will need to follow the process of trust formation which is done through the Master’s Office, beginning with choosing a suitable name for the trust. Unlike in the case of company registration, you are free to choose whatever name you like without having to first reserve a name and, upon registration, your trust will be allocated a unique registration number which appears in this format: IT XXXX/21 (with 21 representing the year in which the trust was formed).

Give careful consideration to the appointment of your trustees, keeping in mind that the care and provision for your child will ultimately be entrusted to them. Ideally, avoid appointing too many trustees as this can cause logistical problems when it comes to convening meetings, attending to matters in person, and signing documentation. If setting up an inter vivos trust, you may want to consider appointing yourself as trustee together with two other trusted people – ideally one of whom is independent. In the case of a testamentary trust, you are able to appoint your child’s guardian as a trustee, although it is often advisable to include one or two other trustees to provide checks and balances.

Ensure that you get expert advice when drafting your trust deed as this document can only be amended by court. Be sure that your trust deed (or will) is clear with regard to the trustees’ powers, duties and obligations, including how they should be remunerated. Ideally, the trust deed should also set out the administrative procedures to be followed by the trustees, whether the trust should be audited, and how disputes should be resolved. If you’re setting up a testamentary trust, it may be a good idea to draft a letter of wishes providing your trustees with guidance on how you would like your child to be cared for when you are no longer around – including medical care – and the type of facilities you would be comfortable for her to be placed in if required.

When applying to the Master’s Office, you will need to submit a covering letter, trust registration documents, two signed trust deeds, and all other documentation required for registration. Only once the Master has issued letters of authority will your trustees be legally mandated to act on the trust’s behalf.

Once formed and the initial donation of assets into the trust has taken place, the trustees will be required to open a bank account and register the trust as a taxpayer with Sars. As a duly registered Special Trust Type A, your trust will enjoy tax rates applicable to natural persons ranging from 18% to 45%. In addition, the annual CGT exclusion of R40 000 is available to this trust, as well as the primary residence exclusion of R2 million of the capital gain on disposal for CGT purposes.

ADVISOR PROFILE

Eric Jordaan

Crue Invest (Pty) Ltd

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