Pros and cons of buying a property through a trust revealed
A trust is a legal entity created by a trust founder that can be used to purchase and own property. Once a trust is created, all assets are placed into the trust by either the trust founder donating the assets to the trust or the trust buying the assets.
If the assets are donated to the trust, a donation tax will need to be paid based on the value of the assets. If the trust purchases the assets, a transfer duty will be applicable.
With the costs involved in setting up a trust, why do some people still use this entity to purchase property?
“While the cost of starting a trust can be significant, purchasing a property through a trust has certain advantages that many feel outweigh the cost,” says Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa.
“A trust is often used to protect the assets and ensure that the appointed beneficiaries, which are more often than not the trust founder’s children, get the benefit of using the assets if something happens to the trust founder.”
Goslett says as soon as the trust is formed and the assets are transferred out of the trust founder’s name, the trust founder is no longer the owner of those assets. What this means is that if the trust founder passes away, the assets in the trust will not form a part of the deceased estate, and will therefore not be used in the calculation of estate duty.
He says the assets within the trust can also not be attached should the trust founder become insolvent, provided the stipulated period has lapsed. A period of six months must elapse if the trust founder was solvent at the time of transfer of assets, or up to two years in the case of insolvency. A trust is, therefore, an excellent way to protect the assets by ensuring the beneficiaries get future use out of them while avoiding paying estate duty on the value of the assets.
“If the trustees wish to purchase additional property, the property will be registered in the name of the trust and not the trustees,” says Goslett.
“If the purchase of the property needs to be financed by a bank, the trustees’ must have the authority to purchase property in the name of the trust, borrow money for the purpose of buying property, and the authority to encumber trust assets as security for the duty of the trust.”
While there are advantages to using a trust to purchase and own property, Goslett says there are also disadvantages.
In that, because the trust founder is no longer the owner of the assets, he or she does not have sole control over them. The trust founder appoints trustees to manage the trust and its assets in a trust deed or document. The trustees are often the trust founder’s attorney or their accountant.
However, Goslett says there are instances where the trust founder also appoints themselves, along with their spouse as the trustees. The duty of the trustees is to manage the assets in accordance with the terms and provisions of the trust deed.
Goslett says it is important to understand the tax implications of forming a trust, and how it differs from those of an individual. In most cases, a trust will pay a higher tax rate than an individual taxpayer.
“Any income received by the trust will be taxed at 41% per annum, and no rebates apply to trusts. A trust will also incur Capital Gains Tax (CGT) on any capital profit that it makes, which will be charged at a higher rate than that of an individual,” he says.
“On the plus side, the rate a trust pays on CGT is lower than the rate of estate duty.
Goslett says that those who are considering forming a trust should ideally consult with a professional financial adviser before they proceed.
“While a trust can be a highly effective vehicle to manage assets, it will not suit everybody's needs,” says Goslett.
“A financial adviser will be able to explain all the implications and assess whether it is the preferable route based on the individual’s personal criteria.”