Ask a financial planner – Should I transfer my house to a trust?
Good day, I’m a 65-year-old widow. My husband died two months ago and the house was in his name. It is paid up and my children have all moved out and started families of their own. I want advice on the best way to transfer ownership as my advisor said I should place it in a trust. Is this the best option in your opinion? – Beth
Hi Beth, we have very limited information but in order to determine the best solution, the following needs to be considered: How the property was dealt with in terms of the Last Will & Testament of your deceased spouse; was it a specific bequest to you or were you named as the residuary heir?
Capital gains implications – No Capital Gains Tax (CGT) will be payable by the estate on the bequest of the property to you as the surviving spouse, as the estate qualifies for a roll-over at base cost.
Transfer duty implications – No transfer duty will be payable on the transfer of the property to you as surviving spouse, as transfer duty is exempt on transfer of property to a beneficiary in terms of the Last Will and Testament, but the transfer costs (legal cost) will nevertheless still be borne by the estate.
If not specifically bequeathed in terms of the Last Will and Testament, and based on the limited information furnished, it appears that there is no existing trust in place. If that is the case, you will first have to establish the trust, incur the initial cost of setting up the trust (as well as the ongoing cost of running the trust), before the property can be transferred to the trust.
The transfer of the property will generally follow a sequence of events: It will first be transferred to the surviving spouse (based on our initial observations) and thereafter from the surviving spouse to the Inter Vivos Trust.
The trust will not qualify for the primary residence exclusion should it sell the property in the future. In addition, the trust will incur transfer duty on the property as well as transfer costs.
If you wish to place the property in a trust (as recommended by your advisor), this can be done in two ways: By way of donation or by way of sale at fair market value (FMV) on loan account.
Donation: If the property is transferred from you to the trust at no cost, this would be regarded as a donation. Donations tax of 20% in excess of the R100,000 annual exclusion would be payable on the market value of the property.
Loan account: If the property is sold by you to the trust at FMV, the balance of the purchase price would most likely remain outstanding on the loan account (in the past this was usually an interest-free loan account). In the event of your death before the loan account is fully repaid, the loan or remaining portion not yet paid will be an asset in your estate.
However, the position of an interest-free loan account now has tax consequences with the introduction of Section 7C. If no interest is incurred by the trust or is incurred at a lower rate than the official rate of interest (currently 8%), then the difference will be treated as a donation made to the trust. Donations tax of 20% of 8% x value of loan will be payable each year (by the donor) to SARS. The annual donations tax exemption may be utilised to reduce the donation.
In the event of sale of the property by the trust, there will be no primary residence exclusion. The rate of CGT in the trust is 32.8%, compared to 16.4% for an individual. The cost to the trust, however, will be rebased to the fair market value.
Should you retain the house in your own name, you will qualify for the primary residence exclusion on disposal or death, and pay CGT at the lower rate of 16.4% (although your base cost will be the same as that inherited from your deceased spouse).
Given the above considerations, we are of the opinion that it is best to retain ownership of the property in your own name and avoid the unnecessary costs and implications referred to above, should you place the ownership of the property in a trust.
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Words: Phil Shapiro, financial director, and Thuli Nkomo, internal IFA, at NFB Financial Services Group.