I am a 40-year-old single mother of two. One of my kids is mentally handicapped. I want to ensure that he is taken care of when I am no longer alive. I also want to ensure that he will not be a burden to his younger sister. I have been considering creating a trust fund for him. I am not wealthy. I only have a house that is still on a mortgage bond, some investment on retail bonds and two life covers. My biggest debt is my mortgage bond. My only source of income is a salary. My questions are:
- Do I have to be wealthy to create a trust fund?
- What type of trust fund would be more suitable for the purpose I have outlined above?
- What expenses are associated with setting up a trust fund?
- Can the founder of a trust fund choose a non-profit organisation as trustee of the fund?
- How can I ensure that the trust fund will be secure after my death?
Trust funds have gained a reputation over the years as being reserved for the rich and wealthy. The reason for this is that historically trust funds were very efficient vehicles for removing assets from one’s estate to shield those assets from estate taxes. In the past few years, in particular, the tax loopholes have been closing and one cannot simply sidestep these taxes as before.
This gives context as it pulls the formation of trust funds back to their original purpose which was always to administer assets for the benefit of those who were either unable or incapable of doing so themselves. Therefore, to answer your first question, you do not necessarily have to be wealthy to form a trust. You should simply have assets that can be administered for the benefit of the trust’s beneficiaries.
There are, however, certain costs involved in the establishment and running of a trust and it would be advisable to assess the value of the assets available to the trust and the ability of the trust to generate the income required for these running costs and needs of the beneficiaries.
In terms of the type of trust, I recommend that you consider a testamentary trust for your personal circumstances. A testamentary trust is formed from the bequests in your last will and testament and therefore your will is used as the founding document for the trust. The purpose of the trust is for it to stand in your stead should you unexpectantly pass away. While you are alive, there would be no need for a trust as you are currently playing that role. Should you pass away, the trust would then be established for your disabled son and would be considered a ‘Special Trust’ for income tax purposes.
This tax status may be awarded to trusts created solely for the benefit of persons with a disability as defined in Section 18(3) of the Income Tax Act, where such a disability incapacitates such person from earning sufficient income for their maintenance or managing their own financial affairs.
There are some expenses involved in the setting up of a trust. Typically, this will include an initial fee to establish the trust and thereafter the trustees are entitled to a fair and reasonable fee for the running of the trust. This ongoing fee is stereotypically charged as a percentage of the value of the assets in the trust. These fees are however negotiable and therefore you may wish to speak with the intended law firm and nominated trustees ahead of a trust being established to possibly have a pre-agreed fee structure you are comfortable with. Keep in mind that this is a professional service and consideration should be given when negotiating a value of cost-saving with the level of service you could expect the trust to receive.
The founder of the trust is free to nominate either an individual or a company as the trustee(s) to the trust as long as the appointment is made in a lawful manner.
The person or company needs to the have capacity to act as a trustee and will need to accept such appointment. Thereafter the trustee must be given written authorisation by the Master to act as trustee. While the trust deed will appoint the trustee the Master will authorise a trustee to act as such.
The most important step you will need to consider with regards to the security of a trust is who you appoint as trustees.
Keep in mind the trustee(s), in general, do have a duty to conserve the trust property and thus must observe good faith and exercise proper care and diligence with the assets. Therefore, a trustee should not expose the trust assets to any undue risk.
Ultimately the trustees should act in the best interests of the beneficiaries of the trust as they are making the decisions around the retention, sale and investment of the assets in the trust. Thus, your decision around the appointment of these trustees will determine the security and longevity of the trust when you are no longer around.