When your child is unlikely to be financial independent, you need to make special plans, writes Geraldine MacPherson: Legal Marketing Specialist.
When you plan your finances, it’s important to make sure you’ve made provision for your young children should something happen to either or both parents. But what if you have a child that will be dependent on you, not only for the rest of your life, but for the rest of theirs as well?
Special Trusts are used to take care of people who due to their age (such as children under the age of 18) or due to a disability, are unable to manage their own finances. A special trust Type A is specifically designed for disabled or mentally handicapped people who are unlikely to ever be financially independent.
While there has been a lot of media around the demise of trusts, it’s important to remember that National Treasury and the Davis Tax Committee have emphasised that special trusts have a specific and important role to play and it seems they’re unlikely to be impacted when it comes to tax changes aimed at curbing the perceived abuse or misuse of trusts to obtain a tax advantage. The main benefit of a special trust is that it is taxed at the rate applicable to individuals, which can be significantly lower than the tax rate applied to an ordinary trust (45%).
Selecting a trustee and guardian
You need to select trustees who will manage the funds on behalf of your children – this is not necessarily their elected guardian/s. You may want to select a trust company for continuity rather than an individual who may pass away before the child. You can then nominate the guardians as co-trustees.
A guardian is not necessarily the same person who would manage the funds of the trust, but rather someone who would be responsible for the day-to-day care of the child. It is very important that you discuss the role with the person you would like to make the legal guardian should you die, as it’s not easy to take on a handicapped child.
The trust deed should be very carefully drafted in order to give the trustees broad enough powers to ensure that they can make appropriate decisions. While you need to stipulate what the trust funds may be used for, such as food, education, clothing and other day-to-day needs, you should be careful of trying to rule from the grave. Give the trustees some discretion on how the money is to be used. This is why it’s important to select trustees you trust.
You also need to consider what happens to the trust property when the trust beneficiary passes away – particularly if their life expectancy may not be as long as is usually the case.
Sufficient and appropriate investments
You need to undertake a full analysis of what it would cost to provide fully for your child’s needs. Whether they would need to go to a special needs home or whether a guardian would manage with additional support. You can donate up to R100 000 a year into the special trust to avoid donations tax but it is unlikely that this would be sufficient. Life cover becomes essential to meet the shortfall and the life cover can be ceded to the trust.
Careful attention must be paid to the appropriate investment products for someone with a disability. It would be inappropriate to sell a compulsory product to a person who has a disability that renders them unable to make their own decisions. For example, if a person who has a mental incapacity is sold a retirement annuity, when or if, she or he reaches retirement age it’s necessary to get a tax certificate in the member’s name. This person has probably never earned an income and is not registered for tax. A curator would have to be appointed to attend to the necessary documents and to then decide on the re-investment options. This can be a very costly exercise and one must question the quality of the advice that was given. Certain risk cover may be appropriate, such as critical illness, but certain types of disabilities may not be insurable. Again, in such a case, you need to get good advice.
Be careful of delaying the establishment of the trust until the death of the last parent, as most people do. There are cases where the parent, in later years, has lost mental competence and placed the incapacitated child at serious risk. If a trust has been formed and the funds provided utilising the R100 000 per annum donation, this could protect the child.
Tax deductions for special needs
During your lifetime you also have day-to-day expenses that you need to plan for. Unfortunately, there is very little assistance from the State and your child will only qualify for the disability grant once he or she turns 18 and only if they cannot earn an income. Although the Receiver of Revenue allows a tax deduction on certain costs, this is only paid as a refund a year after you’ve incurred the expense. Nevertheless, the tax deductions do help and it’s important to get good tax advice to ensure that you’re receiving the maximum benefit.
In order to claim, you need to have a specialist who works with your child to complete an ITR DD form to confirm that the child is unable to function without special support. This can also apply to children with severe learning difficulties or mental conditions, such as obsessive-compulsive disorder or autism.
What you also need to consider:
- All your medical aid contributions, as well as all medical costs, not covered by your medical aid.
- If you require a full-time caregiver, his or her salary is fully tax-deductible as are all meals.
- If your child is required to attend a special needs school the fees can be tax-deductible.
- If you need to purchase a special-purpose vehicle, the customs duty is possibly refundable and the amount refundable can vary between makes and models, so do your homework when buying a car so as to maximise the rebate.
- Any changes you need to make to your home, such as special railings in the bathroom or ramps, can be tax deductible.
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