A trust can be a very cost efficient estate planning tool and may provide protection from creditors in the case of insolvency as well as the unfortunate event of an untimely death in the family.
“A death not planned for can be expensive if the family’s affairs are not structured properly beforehand,” says Laurence van Blerck, who is an estate agent with Knight Frank Residential SA and, having qualified as a CA(SA), has a special interest in property taxes.
A trust is a type of legal entity created when the founder/donor transfers assets, e.g. fixed property, for the benefit of third parties e.g. children/grandchildren. For a trust to be legitimate there must be a separation of control from the enjoyment of the property.
“Please remember, if you are the owner of the property and donate the property to a trust, you lose control of that property,” says van Blerck, noting the trust will be administered by trustees and it must operate in terms of the Trust Deed. Trustees are appointed via “Letters of Authority” issued by the Master of the High Court and the trust is not legally in operation until the Letters of Authority have been issued.
It is vital for a trust to already be in existence, unlike a company which need not be in existence, before it purchases property – the Letters of Authority must have been issued by the Master of the High Court and one must take into account that a trust will take about six weeks to form. Costs of formation are approximately R6,000 to R7,000.
The advantage of a trust is that when the main breadwinner dies, the trust will continue to exist and the property owned by the trust remains in it, and does not need to be transferred to the beneficiaries. The advantages are that there is no payment of Capital Gains Tax on the property and no transfer costs by the estate upon the death of the property owner setting up the trust. The increase in value of the asset donated to the trust will fall outside the value of the estate, thereby reducing any estate duty payable.
Not all rosy
When using a trust to purchase a property there are some disadvantages from a tax point of view, says van Blerck. There is no primary residence exemption of R2m on the sale of the property, even if the family has lived there and is the only property owned.
The percentage of the capital gain on the sale to be included in the taxable income of the trust is 66.6%, i.e. double the 33.3% inclusion in the case of a natural person.
A trust, with certain special exemptions, pays tax at the flat rate of 41%, higher than personal tax rates. The distribution of income in the same tax year of accrual will help to reduce the overall tax rate and this tax saving mechanism is under the spotlight of SARS.
“Nevertheless, the old adage ‘the tax tail must not wag the investment dog’ applies. In other words, important investment decisions must be considered on their merits and not just on the tax considerations,” he says.
A trust pays transfer duty on the acquisition of a property at the same rate as individuals and companies.
Consider your objectives carefully before making a decision about using a trust and consider your risks. Purchasing a property in a trust or donating a property to a trust is a major decision. Transfer duty and transfer costs are expensive – an incorrect decision will be costly to rectify.
“It is, therefore, always advisable to create and operate a trust with professional advice,” says van Blerck.
Gary Sacks, GM of HomeBid, the low commission estate agency and a former private banker, adds that if you are financing the property and obtaining a mortgage bond it is important that the trust is solvent.
“The bank will often request a copy of the trust financials so ensure those are up to date,” he says. “It is also important that the trustees and beneficiaries understand their roles and if a mortgage bond is being sought, their potential liability.
“Some banks offer Trust and Fiduciary services, and importantly are able to act in the capacity of an independent trustee. In doing so they are required to meet with you each year which gives you the opportunity to review your estate, policies and so forth. Make sure that you understand how setting up the trust will benefit your individual situation. There is often no reason to complicate your trust structure when it has no benefit and can become a costly exercise.”