How Does a Special Needs Trust Work in a Will?

If you have a child, sibling, or other dependent with a permanent physical or mental disability, one of the most important estate planning decisions you can make is how they will be financially cared for once you’re no longer able to manage things yourself. A special needs trust, set up through your will, is the tool South African law provides for exactly this purpose.

Here’s how it works.

What Is a Special Needs Trust?

A special needs trust, known in South African law as a Special Trust Type A, is a trust created to hold and manage assets on behalf of a beneficiary with a severe, permanent mental or physical disability that prevents them from earning enough income to support themselves or from managing their own financial affairs.

It can be created in one of two ways:

• As an inter vivos (living) trust, set up and funded during your lifetime, or
• As a testamentary trust, created through your will and only coming into existence after your death.

In this article, we will look at testamentary trusts and how your will plays a role in creating them.

How a Testamentary Special Needs Trust Is Created

When the trust is testamentary, your will is the trust instrument. There’s no separate trust deed to draft and sign while you’re alive. Instead, your will contains the clauses that:

• Identify the beneficiary with special needs.
• Set out which assets (or what portion of your estate) must be transferred into the trust.
• Appoint the trustee(s) who will manage those assets.
• Give the trustees clear powers and guidance on how the funds should be used (for medical care, therapy, housing, day-to-day living costs, etc.).

The trust doesn’t exist while you’re alive. It only comes into being once you pass away and your executor begins winding up your estate. Your executor is then responsible for transferring the relevant assets from your deceased estate into the newly formed trust and for registering it.

Registering the Trust with SARS

Every special trust must be registered with the South African Revenue Service. To register a Type A special trust for income tax and capital gains tax purposes, the trustees need to submit an IT77TR form, together with supporting documentation, which typically includes:

• A copy of the will (since the will serves as the trust document for a testamentary trust).
• A medical report confirming the nature and permanence of the beneficiary’s disability.
• A medical report confirming that the disability prevents the beneficiary from earning sufficient income or managing their own financial affairs.

Why Use a Trust Rather Than Leaving Assets Directly to the Beneficiary?

A few reasons come up consistently in estate planning advice on this topic:

Protection from financial exploitation. People with severe disabilities can be especially vulnerable to being taken advantage of. A trust means a trustee, not the beneficiary directly, controls and manages the assets, releasing funds as needed rather than handing over a lump sum.

Continuity of care planning. The trust deed (your will, in this case) can set out exactly how you want the funds used, giving trustees direction even after you’re gone.

Favourable tax treatment. Ordinary trusts in South Africa are taxed at a flat rate on income retained in the trust. Special trusts, by contrast, are taxed on the same sliding scale used for individuals. This is a considerably more favourable regime for a trust holding assets on behalf of a vulnerable beneficiary. Type A trusts also generally receive more favourable capital gains tax treatment than standard trusts.

Legal separation from your personal estate. Because the assets sit in the trust rather than in the beneficiary’s own name, they’re managed as a distinct pool of assets, which also offers some protection from claims against the beneficiary’s personal estate.

What About Government Disability Grants?

A properly structured special trust can hold and manage assets for a beneficiary’s benefit without those assets automatically being treated as the beneficiary’s own income or assets. This distinction matters for anyone also relying on a state disability grant, since it can affect the outcome of a means test. This is a nuanced area, and anyone in this position should get specific advice on how a proposed trust structure will interact with their grant eligibility.

Choosing a Trustee

Because the trust may need to operate for the rest of the beneficiary’s life, the choice of trustee deserves careful thought. Considerations typically include:

• Whether to appoint a family member, a professional trustee, or both
• Ongoing trustee fees — professional trustees generally charge an annual fee calculated as a percentage of the trust’s assets, though this varies by provider and should be confirmed directly with whoever you’re considering appointing
• Succession planning for the role itself — what happens if your first-choice trustee can no longer serve

Key Takeaways

• A special needs trust set up through a will only comes into existence after death; your will acts as the trust instrument.
• It must be registered with SARS via an IT77TR form, supported by medical evidence of the beneficiary’s disability.
• It offers more favourable tax treatment than an ordinary trust, plus protection and continuity of care for a vulnerable beneficiary.
• Trustee selection and the interaction with any disability grant are the two areas that most often need individual, professional advice.

While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither the writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.