May 31

Providing for the Fiduciary Requirements of Special Needs Children

Appleton Fiduciary Services provides specialist fiduciary services to Warwick Wealth clients. Appleton Managing Director, Lauren Hean, recently spoke to personal finance journalist Maya-Fisher-French about the particular fiduciary requirements of special needs children.

Recently, well-known personal finance guru, Maya Fisher-French, scripted an excellent article in the City Press of Sunday 14 May 2023 outlining some of the key issues when considering the financial needs of a special needs child. In preparation for the article, Maya consulted with Appleton Managing Director, Lauren Hean. An abridged version of the article is reproduced below.

Fiduciary services for a special needs child

If you have more than one child, allocating funds between a child without disabilities and one with disabilities can be a difficult decision. You may feel that you want to give all your children an equal share, however, your special needs child may need more financial support. A proper cashflow analysis of how much your child would need and making sure that the amount left to him or her is sufficient is recommended. A good option could be to require the assets be used to purchase a life annuity which will pay out an income to your child for the rest of his or her life.

Your will should also specify a guardian for your children and, where appropriate, a testamentary trust.

Consideration must be given as to where the child will live and who will take care of them. In selecting a guardian, it is very important that you first discuss this with the person. It is not a role everyone would want to take on. Lauren Hean, MD of Appleton Fiduciary Services, says one should also be cognizant of the age of the guardian. What would happen to the child when the guardian passes away?

Hean recommends that you consider other options for your child should something happen to the guardian. This could include assisted living if appropriate.

It is recommended that you include a letter of wishes, outlining a care plan for the child. “It is very important that you have an open and honest discussion as a family. Everyone needs to know what plans you have made and why you have made those decisions. That prevents disagreements and arguments,” says Hean.

Life cover

Life cover is a great way to protect your child financially after your death. However, you need to understand the escalation of the premium of the life cover. There are different premium patterns and guarantees offered by different insurance companies. Make sure you know that the cover will remain affordable when you retire. There are many cases where people reaching retirement age are unable to maintain the life cover premiums and lose all those years of contributions.

A special trust

All parents of minor children should consider including a testamentary trust in their will. This is a trust that comes into effect the day you die. Special Trusts are used to take care of people who either due to their age (such as children under the age of 18) or due to a disability they are not able to manage their own finances. It is treated differently from a regular trust and is taxed as a natural person. This means it does not attract the far higher tax rates paid by a regular trust.

If you have more than one child and your other children do not have disabilities, it is recommended that you create a separate trust for the child with special needs because for the trust to receive preferential tax treatment, all beneficiaries must either be minor children, or all have a disability.

Historically testamentary trusts were usually set up relatively quickly, within four to six weeks, however, with the delays in the Master’s Court they are seeing cases where a testamentary trust can take up to a year to be created. It is also recommended to create an inter vivos trust if you have a special needs child. This is a trust created whilst you are alive.

If the beneficiary has disabilities, it would qualify as a special trust for tax purposes. You would be able to nominate the trust as the beneficiary of your life cover which would create immediate liquidity to support your child. You could also request your retirement benefits to be paid to the trust.

It costs less than R10 000 to set up the trust, you would need to submit annual financials and you would need to appoint a trustee. Some trustees may waive or lower their fee while the trust does not have any assets or disbursements and only charge a full trustee fee once assets were paid into the trust for the beneficiary.

Hean says one should think carefully about the costs of managing a trust and ensure it is part of the financial plan. If the estate is below R1 million, then it may not be financially feasible to have a trust in place. A R1 million trust would cost around R18 000 a year to administer, which is around R1500 a month. “These are costs that could be going to the care of the child”. 

You need to select trustees who will manage the funds on behalf of the child, this is not necessarily their elected guardian/s. You may want to select a trust company for continuity rather than a natural person who may pass away before the child. You can then nominate the guardians as co-trustees.

The trust deed should be very carefully drafted 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 things such as food, education, medical, clothing and other day-to-day needs, one should be careful of trying to rule from the grave and leave the trustees some discretion on how the money is to be used, which is why it is important to select trustees that you trust.

You also need to consider what happens to the trust property when the trust beneficiary passes away – especially if the life expectancy may not be as high as is usually the case.