What is a testamentary trust and do I need one?

A testamentary trust is a trust created by your will. It does not exist while you are alive. It comes into being when you die, and the trustees you name take control of the assets you leave to it, holding and managing them for the people you want to benefit. The most common reason to create one is to look after minor children, so that their inheritance does not go to the Guardian's Fund but is managed by people you chose, on terms you set. You need one if you have children under 18, a beneficiary who cannot manage money, or an inheritance you want protected over time. If your heirs are financially capable adults and your estate is simple, you probably do not.

How a testamentary trust works

A trust is an arrangement in which one group of people, the trustees, hold and manage property for the benefit of another group, the beneficiaries. The rules for trusts and trustees are in the Trust Property Control Act 57 of 1988. Trustees hold the trust property separately from their own, must act in the beneficiaries' interests, and answer to the Master of the High Court.

A testamentary trust is written into your will under the Wills Act 7 of 1953. The will says which assets go to the trust, who the trustees are, who the beneficiaries are, what the trustees may do with income and capital, and when the trust ends. The trust only starts operating after death.

The steps after death run like this:

1. The executor is appointed by the Master and winds up the estate under the Administration of Estates Act 66 of 1965.
2. The trustees named in the will apply to the Master for letters of authority. Until the Master issues them, the trustees may not act. The Master may require security from a trustee, and can appoint a replacement if a named trustee has died or declines.
3. Once the estate is wound up, the executor transfers the assets to the trustees, who open a trust bank account, take transfer of any property and invest the money.
4. The trustees administer the trust according to the will, paying school fees, medical costs and living expenses for the children, for example, and keeping records.
5. When the end date arrives, usually when the youngest beneficiary reaches a set age, the trustees hand over what remains and the trust closes.

The trust pays its own tax and files its own returns. A trust created solely for minor children or for a person with a disability may qualify for concessional treatment by SARS. Ask the trustees to check.

Why minor children are the main reason

A child under 18 cannot inherit money directly. If you leave an inheritance to a minor and there is no trust, the executor cannot pay the money to the child, and generally may not simply hand it to the surviving parent or guardian either. It is paid into the Guardian's Fund, which is administered by the Master. The Fund holds the money, pays interest, and the guardian can apply for amounts for maintenance and education. The capital is paid out when the child turns 18.

The Guardian's Fund is safe, but it is slow, the interest rate is set by government, and each request for money is an application. Most parents also feel that 18 is too young to receive a large sum. A testamentary trust lets you choose the trustees, direct them to pay for what the child needs, and set the age at which the child receives the capital, often 21 or 25. It also lets you treat several children as one family, so that a younger child's education is not shortchanged because the money was split into equal shares at death.

Immovable property is a particular problem. A house cannot easily be registered in a minor's name and managed on the child's behalf. Leaving it to a trust for the children solves that.

Other reasons to consider one

• A beneficiary with a disability who will need support beyond 18.
• A beneficiary with a drug, alcohol or gambling problem, or who is simply bad with money, where the trustees can pay expenses rather than hand over capital.
• Protecting an inheritance from a beneficiary's creditors, or from a beneficiary's spouse in a divorce, to the extent the law allows.
• A blended family, where you want your spouse to have the income from an asset for life and the capital to go to your children afterwards.
• A family business or farm that should be kept together rather than divided.

Reasons not to create one

A trust has running costs. The trustees may charge a fee, an accountant prepares annual financial statements and tax returns, and there are bank charges. For an inheritance of a few hundred thousand rand, those costs can eat into the capital. If your children are adults who handle money sensibly, a trust simply adds administration.

A worked example

The figures are illustrative.

Sibongile is a single mother of two, aged 6 and 10. She owns a townhouse worth R1 100 000 with a small bond, and has a life policy of R1 500 000 payable to her estate.

Without a trust. Her will leaves everything to her children equally. On her death the executor sells the townhouse, pays the bond and costs, and after estate expenses about R2 300 000 is left. Because the children are minors, it is paid to the Guardian's Fund in two equal shares. Sibongile's sister, who takes the children in, applies to the Master every time she needs money for school fees, and each application takes weeks. When the older child turns 18, he receives roughly R1 150 000 plus interest in one payment.

With a trust. Her will leaves everything to the Sibongile Family Trust, names her sister and a family friend with financial experience as trustees, and directs them to use income and capital for the children's education, health and maintenance. It says the trust ends when the younger child turns 25, with the balance then split equally. The trustees obtain letters of authority, keep the townhouse as a home for the children rather than selling it, invest the policy proceeds, and pay school fees directly. Annual accounting and trustee costs come to about R12 000 a year, which the trust pays from income. Neither child receives a lump sum at 18.

What to do this week

If you are making or updating a will:

1. Decide who the trustees should be. Choose at least two, one of whom is good with money, and name alternates.
2. Decide the end age and what the trustees may spend on before then.
3. Check who your life policies pay to. A policy paid to a minor directly bypasses your will and the trust. Nominating the estate or the trust is often the better route. Ask the insurer.
4. Name a guardian for the children in the same will. The guardian and the trustees need not be the same people.
5. Have the will drafted or checked by someone who does this regularly. Read how to write a valid will and what wills and estates work costs.

If you are a trustee named in a will:

1. Ask the executor for a copy of the will and confirm you are willing to act.
2. Apply to the Master for letters of authority, using the forms the Master's office provides.
3. Do not touch trust assets until the letters are issued.

Documents to gather

For drafting: a list of your assets and debts, your policy schedules with beneficiary details, your children's full names and dates of birth, the trustees' and guardian's full names and ID numbers, and any existing will.

For trustees after death: the death certificate, the will, the letters of executorship, the trustees' certified ID copies, the acceptance of trusteeship forms, proof of a trust bank account, and the executor's liquidation and distribution account showing what comes to the trust.

Realistic timeline

The trust exists from the date of death, but it cannot receive assets until the estate is wound up. The Master's letters of authority for the trustees can be applied for as soon as the will is lodged and are usually issued within weeks, though offices vary. Transfer of assets from the estate to the trust happens when the executor distributes, commonly six to twelve months after death in a straightforward estate and longer where property must be sold. See how long it takes to wind up a deceased estate.

Common mistakes and what they cost

• A policy nominated to a minor. The insurer pays the child, which in practice means the Guardian's Fund, and the trust you drafted gets nothing.
• No end date. The trust runs until the trustees or beneficiaries go to court to end it, at legal cost.
• A single trustee with no alternate. If they die or refuse, the Master must appoint someone, and the delay can run for months.
• Trustees who cannot use capital. School fees cannot be paid from income alone on a modest fund.
• A trust for a small amount. Annual costs on R150 000 can exceed the income it earns.

If you cannot afford an attorney

You can draft a will with a trust clause yourself, and some banks and insurers offer will drafting at low cost, though the trust wording needs care. The Master's office deals directly with the public, provides the trustee forms, and answers questions about letters of authority at no charge. Where an estate is small, the Master may issue letters of authority under section 18(3) of the Administration of Estates Act rather than appointing a full executor. Legal Aid South Africa on 0800 110 110 applies a means test. University law clinics draft wills for people who qualify. See our legal aid page. The Guardian's Fund figures, the Master's fees and the small estate threshold change from time to time, so use our executor fee and estate duty calculator for current numbers.

Frequently asked questions

People ask whether a testamentary trust and a family trust are the same. A family trust is usually an inter vivos trust, set up by a deed during your lifetime and registered with the Master immediately. A testamentary trust is created by your will and only comes into being at death. You can leave assets to an existing family trust instead of creating a new one.

People ask whether the surviving parent can be a trustee. Yes, and it is common, but consider adding an independent trustee so that decisions about the children's money are not made by one person alone.

People ask whether a trust avoids estate duty. Not on your own estate. Assets left to the trust form part of your estate for estate duty. Read how estate duty is calculated.