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Plan for your children's future with trust fundsTALK to anyone who is in the business of writing , willsand they'll tell you some funny stories. For instance, the man who formed a trust in his will for the benefit of his children - but the children could inherit only when the youngest turned 65! In this case, forming the trust was a good idea. It's just a pity the testator tried to rule from the grave. Trust funds are used extensively in estate planning. What can be confusing though, is that two different types of trusts are used, and each for a different purpose, namely "inter vivos" and "testamentary" trusts. An inter vivos (living) trust is created during your lifetime for a specific purpose - to plan your financial affairs and/or to minimise future estate duty. This type of trust has been used extensively in tax avoidance schemes, which is why they've recently been frowned upon by the Katz Commission of Inquiry into Taxation. A testamentary trust is the one you create in your will, and which comes into effect only once you've passed on. This is the type being looked at today. In essence, when you create a trust, you appoint trustees to look after the assets you leave behind until your beneficiaries (heirs) have reached the age stipulated in your will. André Meyer of Syfrets Fiduciary Services in Gauteng says creating this type of trust is suited to people who want their minor children to inherit only after the age of 21 (or later), and who have sizeable estates. Because there are costs involved in administering a trust, Meyer's view is that unless a beneficiary inherits assets of at least R50 000, it's uneconomical to create a will trust. (Smaller bequests can be awarded to the guardian to be managed on behalf of the beneficiary.) You can stipulate any age at which you would like your children to receive their assets from the trust. The most common age is 25, says Meyer, and the minimum age is 21 when a child reaches majority (but the child attains majority at an earlier age if he or she gets married). The daily workings of a trust are as follows (the will stipulates the age of 25): The minor child's guardian tells the trustees what money is needed for, say, school fees or monthly maintenance costs. The trustees pay out the money at their discretion after due consideration. Once the child reaches majority, he or she applies directly to the trustees for the required funds. On the beneficiary's 25th birthday, the trust dissolves and the assets are handed over. In theory, you can appoint anyone you like as a trustee (and as many as you like), but practically it's best to appoint a professional, that is, a trust company, accountant or attorney. It's a good idea to appoint a family member as co-trustee for the "personal touch". There's nothing to stop your child's guardian from being a trustee; and the trustee needn't be the executor of your estate. Having too many trustees, however, can make running the trust cumbersome. Various formats can be used in creating a trust in your will, says Meyer. You can, for instance, set up a separate trust for each of your minor children. You can also create a single "common-pool" trust which is shared by all your children. Meyer prefers a trust for each child because it results in a more equitable distribution of assets where the estate is fairly substantial. For smaller estates though, a single trust may be more appropriate, he says, because the children then share in the trust according to their needs, and the remainder of the capital is distributed only when the youngest child completes her education. The accompanying example of a simple will incorporates setting up a trust for each child. In this will, the testator, Minny Mo, is bequeathing everything to her minor children. Mo stipulates that the children will inherit from the trusts only at the age of 25. Clause five deals with the assets which should be excluded from a trust (such as household effects and personal items). Usually only income-producing assets (such as shares, property and bank deposits) are held in trust. Clause six deals with setting up the trusts. Meyer points out that the last sentence allows for the trust to be terminated at an earlier date than that stipulated in the will. "This decision is never taken lightly by trustees, but it may be appropriate if, say, the age stipulated in the will is 30 years, but by the time the beneficiary is 26, there's only R10 000 left in the trust. It's clearly in the beneficiary's interest to dissolve the trust at that stage," says Meyer. Clause seven confers powers on the trustees to do their duties. Wide powers have been given in this will, but Meyer points out that the criteria for choosing trustees is that they should be "reasonable" people. They are also obliged to act with "diligence, care and skill" in terms of the Trust Property Control Act. Trusts protect your assets for the benefit of minor children, but there are pretty high running costs (all of which usually go the professional trustee rather than the trustee who is a family member). The current market average costs are: 1.5% of the assets at commencement of the trust; a 1% annual charge, plus 7.5% of the annual income collected; and 2% of the assets when the trust is dissolved.
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