8 things every testator should know about testamentary trusts

A testamentary trust, sometimes referred to as a mortis causa or will trust, is one of the most effective and widely used estate planning tools in South Africa. Created through a stipulation in the testator’s will and activated upon their death, a testamentary trust provides a structured and legally recognised way to protect assets for beneficiaries. Here, we take a practical look at how testamentary trusts work and what every testator should know before including one in their estate plan.

Why set up a testamentary trust?

The most common purpose is to protect assets intended for minor children who cannot legally inherit until the age of 18. However, the uses go far beyond this. For example, parents of a special-needs child can set up a Type A special trust to provide for their child in a tax-efficient way. Further, where a testator fears that beneficiaries may squander their inheritance, assets can be housed in the trust and managed responsibly by appointed trustees. Testamentary trusts can also be useful where an indivisible asset, such as a holiday home or farm, needs to be shared among multiple heirs.

How is a testamentary trust created?

Unlike a living trust (inter vivos trust), which is established during one’s lifetime through a trust deed, a testamentary trust is created through the testator’s Will. In this case, the Will becomes the trust instrument and the testator is recognised as the founder or settlor.

To ensure validity, the Will must clearly set out the testator’s intention to create a trust, name the beneficiaries, identify the assets to be placed in trust, and stipulate the terms and conditions under which the trust will operate. Bear in mind that if the Will is declared invalid for any reason, the testamentary trust cannot come into existence, which makes professional drafting essential.

Choosing trustees wisely

Trustees have a fiduciary duty to act in the best interests of the beneficiaries and to comply with the terms of the trust. As such, it is vital to nominate individuals who are both capable and trustworthy. After the testator’s death, nominated trustees must apply to the Master of the High Court for Letters of Authority before taking control of the trust assets. In practice, a panel of no more than three trustees is advisable, and in our experience, appointing at least one independent trustee with trust management expertise provides an important safeguard.

The law that governs testamentary trusts

While all trusts in South Africa are regulated by the Trust Property Control Act, the legal principles underpinning a testamentary trust differ from those governing a living trust. Whereas living trusts are based on contract law, testamentary trusts are rooted in the law of testation, and these principles affect everything from how the trust is interpreted to how disputes may be resolved.

Protecting the inheritance of minors

Children under the age of 18 cannot inherit directly as they lack legal contractual capacity. Without a testamentary trust, any inheritance due to a minor would generally be paid into the Guardian’s Fund, administered by the Master of the High Court, until the child reaches majority. With this in mind, establishing a testamentary trust ensures that assets are preserved and managed for the child’s benefit, rather than left in the hands of the state until they come of age.

Understanding the tax implications

A key advantage of testamentary trusts lies in their tax treatment. Specifically, a Type A special trust, set up in terms of the Income Tax Act for a beneficiary with a mental or physical disability, enjoys the same sliding-scale tax rates as a natural person (currently ranging from 18% to 45%). In addition, it benefits from the R40 000 annual capital gains exclusion and the R2 million primary residence capital gains exclusion.

Can a testamentary trust be contested or amended?

Freedom of testation is a cornerstone of South African succession law, and it is exceptionally difficult to challenge the terms of a testamentary trust. Aggrieved heirs who are excluded do not have a legal basis to amend the trust deed simply because of their exclusion. Generally speaking, trustees also cannot amend the trust instrument once the testator has passed, as the testator’s consent can no longer be obtained. 

When does a testamentary trust end?

The terms of the Will usually stipulate the conditions under which the trust terminates. Typically, this occurs once beneficiaries reach a specified age, after a predetermined period, or following a particular event, at which point, trustees distribute the remaining assets in accordance with the trust instrument. As such, clarity around termination helps avoid disputes and ensures that the testator’s wishes are carried out smoothly.

Testamentary trusts remain one of the most practical, flexible, and protective tools available to South African testators. By understanding their purpose, creation, governance, and termination, you can ensure that your assets are managed responsibly and that your beneficiaries receive the financial protection you intend.

* Odendaal is a certified financial planner at Crue Invest.

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