A trust is a legal entity consisting of a donor/founder, trustees and beneficiaries. The founder holds assets (without owning them) for the benefit of the trust beneficiaries. The trustees in fact become the legal owners of the property but have to manage it in terms of the trust’s provisions (which may only be altered in compliance with provisions of the trust deed).
Benefits of transferring property into a trust
A trust is the only entity that benefits from total asset protection. It therefore ensures that your property can avoid being captured by creditors.
Another major benefit is that the property no longer falls into your personal estate and it thus not subject to inheritance tax. The ownership and benefits can then be passed onto you family quickly and without complicated tax issues.
Homeowners must be aware that, when transferring their property into a trust, that they are doing so out of their direct control. A recurrent problem with trusts occurs when the relationship between the founder and trustee goes sour (e.g. if there is a divorce or family dispute). This can result in the beneficiaries not having access to the income or benefits of the property.
It is vital that the founder carefully chooses the trustees and weighs up the chances of any disputes against the other benefits of the trust and considers whether a trust is the best vehicle.
When an outsider deals with a trust (e.g. in selling a property to the trust), care must be taken to ensure that the required number of trustees has agreed to the sale, and that the beneficiaries’ consent has been obtained if this has been stipulated by the trust. If the beneficiaries vote against the decision, the trust may have the right to set aside the transaction.
Trust founders must acknowledge that if they set up a trust and donate or sell a property to it, they effectively give ownership of that property to the trustees.
The founder of a trust may be a trustee themselves, but this does not entitle him/her to handle the trust’s property as if it were his/her own. Every property investor must recognise this basic aspect of using trusts.
How to transfer property into a trust
- Donation: Although this is often considered the ideal way to go, there is a setback: you’re only allowed to donate R100 000 total per annum. After that you will have to pay 20% Donations Tax.
- Sale: When transferring through a sale, you sell the asset to the trust and take the tax consequences, which are usually Transfer Duty and Capital Gains Tax. Transfer Duty does not apply if you sell the shares of a company that owns commercial property, but if it owns residential property, you are deemed to have sold the property to the trust and must pay transfer duty.