How to use a testamentary trust

What is a testamentary trust?

You can make provision for a testamentary trust in your will. It is a trust that comes into effect when you pass away – hence the name ‘testamentary’ as it only begins to operate posthumously. Living trusts (also known as inter-vivos trusts ‘between the living’), on the other hand, are established during your lifetime and come into effect as soon as they are registered with the Master of the High Court.

Benefits of a testamentary trust

1. Asset protection: One of the key benefits of a testamentary trust is it provides a structured way to manage and protect assets on behalf of your beneficiaries. Especially if they are minors or unable to manage their inheritance independently, for example if they have a disability or special needs. A testamentary trust ensures that the assets are used according to your instructions, providing ongoing financial support and management for your beneficiaries.
2. Tax efficiency: A testamentary trust can help mitigate estate tax (also called inheritance tax or estate duty) and other taxes. By strategically placing assets in a trust, you can reduce the taxable value of your deceased estate, decreasing the estate duty payable upon your death. This protects your legacy and preserves more for your beneficiaries to inherit.
3. Flexibility: With a testamentary trust, you can set specific terms, conditions and timelines according to which trust assets must be distributed and funds released. 

How does a testamentary trust work?

When you create a testamentary trust in your will, you appoint a trustee who will be responsible for managing the trust assets according to your instructions. The trustee plays a crucial role, ensuring that the assets are safeguarded and distributed to your beneficiaries as intended. Choosing a reliable and competent trustee is essential to the success of your testamentary trust.

Testamentary trust vs Living trust

Testamentary trusts and living trusts serve specific purposes and are established in different ways.

• Testamentary trust: Created in your will and only takes effect after your death. Particularly useful for managing assets on behalf of minor children or dependents, and can be tailored to provide long-term financial support.
• Living trust (inter-vivos trust): Created and becomes operational during your lifetime, as soon as it’s registered with the Master of the High Court. Allows you to manage your assets while you are alive. 

Incorporating a testamentary trust into your estate planning

Integrating a testamentary trust into your estate planning strategy can offer peace of mind, knowing that your assets will be managed according to your wishes. Here are some steps to consider:

• Draft your will: Ensure your will clearly outlines the creation of the testamentary trust, specifying the assets to be included, the terms of the trust, and who the trustee(s) should be.
• Choose a trustee: Select a trustworthy and capable individual or institution to act as your trustee. The trustee will be responsible for managing the trust and ensuring that your instructions are followed.
• Review and update: Regularly review and update your will and testamentary trust provisions to reflect any changes in your circumstances or wishes (for example when you get married, have a child, or get divorced). This ensures that your estate plan remains current and effective.

A testamentary trust is a powerful tool in estate planning, offering protection, control, and tax benefits for your beneficiaries. By understanding how a testamentary trust works and incorporating it into your estate planning, you can ensure that your assets are managed and distributed according to your wishes, providing long-term security for your loved ones.

Seeking professional advice on establishing a testamentary trust is a good idea, to navigate the legal intricacies and create a robust estate plan that protects your legacy and safeguards your family’s future.