Maintenance and your will
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This article was first published in the fourth-quarter 2014 edition of Personal Finance magazine.
When does the obligation to pay maintenance to children and former spouses end? This is a vital consideration that is often overlooked in estate planning and when wills are drafted. A lack of proper planning can have serious unintended consequences for the people you want to benefit from your estate.
The legal position
Maintenance obligations for child support
Parenthood automatically results in the obligation to support a child. This obligation arises upon the birth of a child, regardless of whether the child is born in or out of wedlock. In terms of the Children’s Act of 2005, maintenance is payable to a child until the age of 18 years. A child over 18 years does have a claim for maintenance, but must apply to the court and show good cause why he or she is still in need of it.
The obligation for child support can be terminated only by the child’s death, not by the parent’s death. Therefore, the child has a right to claim maintenance from a deceased parent’s estate. Any maintenance order that is already in place will also be binding on the deceased estate.
Maintenance obligations for spousal support
The situation is somewhat different when it comes to spousal support. Where divorce is concerned, the key to maintenance obligations is the wording of the divorce order granted in favour of the spouse. In Kruger v Goss 2009, the appeal court determined that an ex-spouse does not have a claim for maintenance against the deceased estate of her ex-husband unless the divorce order specifically states that the maintenance order is binding on the deceased estate. There is usually the additional provision that the order will terminate on the death or remarriage of the ex-spouse, whichever occurs first.
A current spouse is likely to have a maintenance claim against the deceased estate of his or her spouse if there is no provision for maintenance in the will or by other means.
Effect on estate planning
When proper provision is not made in a will, maintenance claims can significantly delay the finalisation of the estate. The deceased’s assets can be distributed to beneficiaries only once all creditors’ claims have been settled. Maintenance orders and related claims constitute creditors of the estate, and these are settled in full only once a child turns 18 (or later, in the case of a court order made in favour of a child over 18), or an ex-spouse remarries or dies.
The trust option
A lump-sum bequest directly to an ex-spouse and/or child in your will is one way of covering maintenance needs, but it is unconditional and does not take into account that a spouse might remarry, or a child become self-supporting. Thus, either or both might benefit beyond their entitlement and disadvantage other beneficiaries.
Instead, a trust can be an effective mechanism for ensuring that a deceased estate can be finalised and that your heirs are protected against further claims. This option entails bequeathing a cash lump sum (actuarially calculated as the present value of future obligations) to a testamentary trust (also known as a will trust), or transferring a cash lump sum to an inter vivos trust (sometimes called a living trust) with your ex-spouse or child as the beneficiary. The funds in trust are then used to settle the maintenance obligation. As a trust would not automatically have any obligation in relation to the maintenance order, it is advisable to have the trustees sign an agreement whereby they agree to take over the maintenance obligation.
Tax and other considerations
Inter vivos trust
When a cash lump sum is transferred to an inter vivos trust, the amount escapes donations tax in terms of the judgment in Estate Welch v CSARS . In this particular case, it was held that the transfer of assets into a trust for the express purpose of discharging legal obligations that the settlor owed to third parties did not amount to a donation either in common law or within the meaning of the definition of “donation” in the Income Tax Act of 1962.
Payments to an ex-spouse for monthly maintenance, when payable in terms of a divorce order, are exempt from income tax in terms of section 10(1)(u) of the Income Tax Act.
The tax implications of amounts distributed to children in terms of a maintenance order are less clear. As the transfer of a cash lump sum to a trust with the intention of discharging a maintenance obligation is not seen as a donation in terms of the Income Tax Act, it is uncertain whether section 7(3) – which attempts to prevent tax evasion by regulating when a sum of money donated to a minor child must be taxed in the hands of the parent or donor – applies where a minor child is concerned. It appears that maintenance payments received by both minor and major children are taxable in the hands of the child, as maintenance orders for child support are specifically included in gross income without any exemption applying. A trust is also not able to claim the maintenance payments as a tax deduction.
Another consideration when you contemplate an inter vivos trust is the annual administration costs during the lifetime of the person ordered to pay the maintenance. These include, among others, the costs of registering the trust with the Master of the High Court and the South African Revenue Service, and, annually, the costs of keeping proper account of the trust’s books, preparing and filing income tax returns for the trust, having trustees’ meetings with prepared agendas and minutes, and remunerating the trustees.
Furthermore, when you transfer funds to an inter vivos trust to pay maintenance, you lose control of the funds and the opportunity to invest the funds for your own benefit during your lifetime. On the other hand, there is no estate duty or executor’s fee to pay on this amount when you die, as the amount distributed to the trust falls outside the dutiable estate. This might also expedite finalisation of the estate, as there would be no testamentary trust to set up. However, should the obligation to pay maintenance end before you die – because your ex-spouse remarries, for example – you would have incurred the additional costs of setting up an inter vivos trust (as opposed to a testamentary trust) for no benefit.
If you opt for a testamentary trust, the cash lump sum is bequeathed to the trust in your will with your ex-spouse or child as the beneficiary. As the lump sum is transferred to the testamentary trust after your death and in terms of your will, it forms part of your deceased estate and is, therefore, subject to executor’s fees and estate duty at a rate of 20 percent (if your estate is subject to estate duty). Before your death, the maintenance payments would be made in your personal capacity and would be exempt from tax in the hands of an ex-spouse receiving them in terms of a divorce order, but would probably be taxable in the hands of a child receiving them.
After your death, the payments would be continued by the testamentary trust. The tax consequences of distributions made to the child or ex-spouse, as beneficiaries, are the same as they would be with an inter vivos trust. (It should be noted that there is some doubt as to whether or not maintenance payments received from a former spouse’s deceased estate – or any vehicle used to make such payments, such as a trust – do qualify for the exemption in terms of section 10(1)(u). However, my interpretation of the law is that the exemption does apply in these circumstances.)
As mentioned before, a further consequence of using a testamentary trust is that it takes time to set up, so it might delay finalisation of the estate, whereas an inter vivos trust would already exist. Although the cash lump sum forms part of the deceased estate and might increase the estate duty and executor’s fees payable at death, the testator does have the advantage of controlling the money during his or her lifetime, since the cash lump sum is not allocated until the trust is created in terms of the will.
It is easy to forget that an obligation to provide maintenance for an ex-spouse or a child does not end with death. A claim against your estate could cause serious delays and, possibly, a reduction in the assets available to the beneficiaries of your will. Obtaining expert advice when you draft your will is critical to achieving the effect you want and ensuring your executor has the tools to carry out your wishes efficiently. This article focuses on trusts as effective and well-used planning tools, but whether you choose one of them as your solution depends, of course, on your specific circumstances and preferences.
* Carien Strauss is a fiduciary and tax specialist at Sanlam Private Wealth and a member of the Fiduciary Institute of Southern Africa.