How to set up a living trust for your grandchildren’s education

How to set up a living trust for your grandchildren’s education

Last updated on 12th December, 2017 at 04:36 pm

A recent ‘Life Surprises’ survey by Sanlam revealed that more than 40% of South Africans over 50 are unexpectedly supporting family members, with grandchildren being one of the largest supported groups.

If you are in this position, you may be wondering how you can ensure that your grandchildren receive the best tertiary education – given that you may no longer be around when they leave school. One of the best ways to protect funds for your grandchildren’s future is through a living (inter vivos) trust, says David Thomson, legal adviser at Sanlam Trust. “As opposed to a testamentary trust, which comes into effect after you die, a living trust is set up while you are still alive. If you should die before your grandchildren start their tertiary education, the trust will simply continue until the funds are needed,” he says. Some of the most important reasons to set up a living trust are to protect your assets against claims from creditors, insolvency or even divorced spouses. In the event of your death, it also prevents your grandchildren’s guardians from taking control of funds you’ve set aside for their education. “You can specify the type of protection you want, the purpose and the duration of the trust, and the beneficiaries as you see fit. You can donate funds to the trust, but more than R100 000 per year per donor will become subject to a donations tax of 20%. It is possible to transfer (‘sell’) your assets to the trust on loan account*. This won’t have any capital gains or income tax advantages for you in the short term, but it will protect the funds’ future growth against any claims arising against you. It also means that if you die, only your outstanding claim on the loan account will form part of your deceased estate, not the growth, which belongs to the trust,” Thomson says. To avoid this it may be best to structure your trust as a vesting (bewind) trust such that the grandchildren are entitled to certain benefits rather than utilising a purely discretionary trust.

Tips for setting up a living (inter vivos) trust

  • Provide guidance to the trustees. Besides the trust deed, which is the formal trust registration document, it is a good idea to write a confidential letter of wishes to the trustees, which makes your wishes clear should you no longer be around to voice them personally, but without any sense of ‘ruling from the grave’.
  • Choose your trustees carefully and plan their succession. Subject to the oversight of the Master of the Supreme Court, the trustees will make all the decisions with regard to the trust. You need to have complete faith that they will carry out your wishes. “You also need to name trustee successor options in the trust deed. To ensure continuity, we recommend nominating a reputable trust company as one of the trustees from the start, even if the other trustees are family members. And always have a ‘Plan B’, should something go wrong with your first-choice succession plan,” Thomson says.
  • Give the trustees powers to make appropriate growth investments. A trust is a contract, and the trustees only have the powers they are given in terms of this contract. “To ensure optimum growth of your grandchildren’s education funds, be careful not to limit these powers too much. We know of a case where a testamentary trust deed drawn up in the 1970s – when we didn’t have inflation – stipulated that the trustees must invest the money in a fixed deposit. Imagine what the trust would have been worth today if the trustees had had the flexibility of investing in equities or in the capital market instead,” Thomson says.

Setting up any kind of trust is a complex matter. “It is not a ‘product’ you can simply buy from a financial service provider. To avoid stepping into what is potentially a legal minefield, it is crucial that you obtain the assistance of a qualified fiduciary practitioner such as Sanlam Fiduciary Services. It will definitely be money well spent to secure your grandchildren’s legacy,” Thomson concludes.   *Just bear in mind that most interest-free and low-interest loans (lower than current official rate of 8%) are from 1 March 2017 seen as a deemed donation in view of the recent tax law amendments.

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