Persons with disabilities may benefit from a special trust

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Unlike “conventional trusts” that are taxed at a flat tax rate, a special trust is taxed on the same sliding scale applicable to natural persons.

The Income Tax Act provides for two types of special trusts: a so-called type-A and type-B trust. In essence, a type-A trust is created for a person (or persons) having a disability, while a type-B trust is created on a testator’s death and can exist only while it has a minor as a beneficiary. The distinction between a type-A trust and a type-B trust is vital because a type-A trust qualifies for specific relief from capital gains tax but the same is not granted to a type-B trust. This article focuses on the characterises of a trust in order for it to qualify as a type-A trust.

Characteristics of a type-A trust

A type-A trust can either be:

  • an inter vivos trust created during the lifetime of the founder of the trust;
  • a testamentary trust created by, or under, the will of a deceased person (testator); or
  • a trust created as a result of a court order in favour of a specified natural person.

Type A special trusts must have the following characteristics to qualify for the favourable tax dispensation:

  • The trust must be created solely for the benefit of one or more persons with a disability. In essence, this means that the trust deed must not provide for the possibility of any beneficiary who does not have a “disability” for as long as the person(s) with a disability is or are alive.
  • For a trust to be a type-A trust, its beneficiaries must be incapacitated as a result of their disabilities from –
    • earning sufficient income for their maintenance; or
    • managing their own financial affairs.
  • It is a requirement that at least one of the beneficiaries, for whose sole benefit the trust was created, should be alive on the last day of February of the relevant year of assessment of the trust. A trust will accordingly cease to be a type-A trust from the commencement of the year of assessment during which all the beneficiaries with a disability for whose sole benefit the trust was created, are deceased.
  • A trust that is created solely for the benefit of more than one person with a disability must be for the benefit of persons with a disability who are each other’s relatives. The relationship between the founder or settlor and the beneficiaries is of no consequence. The requirement is that the beneficiaries having a disability must be relatives, not the founder or settlor. Accordingly, The relationship between the beneficiaries and founder or settlor has no impact on whether a trust qualifies as a type-A trust

It is important that where persons of disability are reliant on trust income to support their livelihood, these requirements be carefully considered and that the trust is correctly registered as a type-A trust with the South African Revenue Service. Should you require assistance in this regard, feel free to contact your tax adviser for more detail.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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