Buying in a trust: careful of alter egos
Is it better to buy a property in a trust than through other vehicles? Carol Reynolds, Pam Golding Properties area principal for Durban Coastal, says that her agency generally encourages buyers of residential property to purchase their primary residences in their personal capacities. “This way they will enjoy the R2m capital gains tax exemption when they come to sell,” she says. “However, for second and third properties that cannot be construed as primary residences, buying in a trust makes the most financial sense.”
Reynolds says trusts offer homeowners huge value in that they are well suited for asset protection and ring fencing risk. In addition, they have the benefit of being passed from generation to generation and hence bypassing estate duties.
Another plus is that the trust can be taxed in the hands of the beneficiaries. This often results in a lower tax bracket for the parties, and hence less tax liability.
“It is however important to note that you cannot buy property in the name of a trust to be formed,” she says. “The trust needs to be in existence at the date of sale. Fortunately, registering a trust doesn’t take long – usually about two weeks. Ideally, an attorney or accountant will register the trust for you and then it is best to ask the attorney or accountant to stay on as an independent trustee.”
SARS is looking at trusts very closely, so they need to be managed correctly. This means having an independent trustee, maintaining records, maintaining accounts and ensuring that the trust is not deemed to be an “alter ego” – ie simply an extension of the self in a contrived legal entity.
Most attorneys and accountants will support property ownership in trusts because of the asset protection benefits as well as the tax savings. “It is always best to seek advice from an accountant before making a decision in this regard,” says Reynolds. “Generally, we find that most of our sales transactions are concluded with individuals in their personal names, largely because of the capital gains exemption, while trusts and companies account for a small percentage of sales. Companies tend to be the preferred option for commercial property transactions whereas trusts are used for both residential and commercial sales.
“It is best to obtain advice before choosing the correct legal entity for a property purchase. It is also important to have signed resolutions on hand when you are dealing with trusts, as sometimes it can be tedious obtaining signatures from all the trustees, particularly when they do not all reside in the country.”