What’s the best trust type to set up for my mentally ill son?

If you have a child with special needs that prevent them from managing their own affairs, making provision for their financial future, especially when you are no longer around, is naturally a priority for you.

Our law recognises this need and has made provision for parents of such children to create what is known as a Special Trust Type A, which is given efficacy by a number of pieces of legislation, including the Trust Property Control Act, the Income Tax Act, and the Mental Health Act.

As the trust founder, you may transfer assets into the trust by either sale or donation – or, on your death, in terms of your will if you intend to set up a testamentary trust.

The trustees that you appoint will manage the assets of the trust in the best interests of your child, and the trust will only cease to exist in the event of your child’s passing. Remember, the sole purpose of such a trust must be to provide for your special needs child, and no other person or beneficiary can stand to benefit from it.

If you’re considering setting up such a trust, it is important to first determine whether your child’s disability meets the qualification criteria.

This type of trust must be set up in terms of Section 6B (1) of the Income Tax Act and must be duly registered with the South African Revenue Service (Sars) in order to qualify for the special tax dispensation afforded to such vehicles. This section of the act defines disability as a ‘moderate to severe limitation of any person’s ability to function or perform daily activities as a result of a physical, sensory, communication, intellectual or mental impairment’.

In terms of the Mental Health Act, a mental illness refers to a ‘positive diagnosis of a mental health-related illness in terms of accepted diagnostic criteria made by a mental healthcare practitioner’. Importantly, your child must have suffered from a mental or physical disability for at least 12 months, and the condition must be deemed to be permanent.

Remember, when setting up the trust, you will be required to submit medical reports from your child’s registered medical practitioners in support of the application.

Before setting up the trust, you will need to consider whether it should take the form of a testamentary or living trust. A living, or inter vivos, trust is set up during your lifetime using a trust deed as the trust instrument, whereas a testamentary trust is set up in terms of your will and is only formed in the event of your death. Your personal circumstances and that of your special needs child will largely determine which type of trust is most appropriate for your needs.

If you are in good health, live in close proximity to your special needs child, and are capable of ensuring that your child is adequately cared for, then a testamentary trust would be more appropriate as it is only after your passing that your child would benefit from having trustees manage her affairs.

On the other hand, if you have health challenges of your own, live far away from your child, or frequently travel abroad, then it may be worth considering setting up a trust while you are still alive.

For instance, you may have other adult children who you would like to help you in managing the affairs of your special needs child, in which case an inter vivos trust would be appropriate. That said, you must be prepared for what it means to relinquish full control of the assets transferred into the trust and allow the trustees to administer those assets according to their mandate.

You will also need to give thought as to whether your trust will be a vested or discretionary trust. If set up as a vested trust, your special needs child will have a vested right to the trust assets, which may not be ideal. On the other hand, forming a discretionary trust means that your trustees will have discretion as to how your child will be paid and how the assets will be dealt with. This may be a more appropriate form of trust bearing in mind that your child’s condition may change and/or deteriorate over time, and your trustees will be able to adjust how the assets are managed according to the changing needs of your child.

Trustees

Give consideration to the appointment of your trustees, keeping in mind that the care and provision for your child will ultimately be entrusted to them. Ideally, avoid appointing too many trustees, as this can cause logistical problems when it comes to convening meetings, attending to matters in person, and signing documentation.

Read: What to know when nominating your trustees

If setting up an inter vivos trust, you may want to consider appointing yourself as trustee together with two other trusted people – ideally, one of whom is independent. In the case of a testamentary trust, you are able to appoint your child’s guardian as a trustee, although it is often advisable to include one or two other trustees to provide checks and balances.

In closing, we recommend seeking the advice of a fiduciary expert to guide you through the process.