A Trust: The Key to Financial Security?
Category Owners Advice
The idea of a trust is often understood in popular imagination as something reserved for the super-wealthy. However, a trust has many benefits for people from many walks of life, especially those looking to protect their assets. It can help property owners ensure that their assets are efficiently transferred through generations and much more.
What Is a Trust?
In the simplest possible language, a trust is a 'legal person' (but not an actual person). That means a trust may be the registered owner of the property as indicated on a title deed. Furthermore, a trust is a 'legal person' who cannot die. As such, it is an effective vehicle for transferring ownership to one's heirs. Additionally, a trust can be a conduit for income generation and distribution of funds to beneficiaries. Importantly, a trustee must be nominated to administer the assets of the trust for the benefit of those stipulated as beneficiaries.
In terms of the Trust Property Control Act, 57 of 1998, a "trust" is defined as:
"[...] the arrangement through which the ownership in property of one person is by virtue of a trust instrument made over or bequeathed-
(a) to another person, the trustee, in whole or in part, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument; or
(b) to the beneficiaries designated in the trust instrument, which property is placed under the control of another person, the trustee, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument,
but does not include the case where the property of another is to be administered by any person as executor, tutor or curator in terms of the provisions of the Administration of Estates Act, 1965 (Act No. 66 of 1965)".
What Are the Benefits of a Property Trust?
- In terms of planning your estate in the event of your passing, a trust can be very useful. A trust will not die and so it's not liable for estate duty, transfer duty, executor fees, or conveyancer fees.
- A trust serves as asset protection in the case of insolvency. If one is unable to pay creditors, then one's assets may be liquidated to fulfil the debt. However, if the insolvent person is not the registered owner, then it will not be forfeited as collateral.
- A trust is a good way to procure a much larger portfolio of property assets than would be possible if bought and registered using one's name.
- Using a trust to distribute income to multiple beneficiaries can help to reduce the overall tax exposure of the wealth its assets generate.
What Are the Disadvantages of a Property Trust?
- One of the biggest disadvantages of a trust is that any income held by the trust and not distributed to the beneficiaries is taxed quite heavily. It is subject to income tax at a rate of 40% and capital gains tax if the funds generated by income are held by the trust. This means that a trust won't always make financial sense when compared to the alternative of ownership in one's name.
- Trusts are required to issue annual financial statements. Not a downside in and of itself, but does increase the levels of administration required.
- Applying for bonds via the trust is typically not as easy compared to originating a bond in one's own name. The reason for this is that a trust won't necessarily have other assets for lenders to leverage as security. Additionally, a loan origination must have consent from all trustees.
Is It Better to Buy Property Through a Trust?
The answer to this question will depend on multiple factors. What objective are you trying to achieve with your property investments? Are you looking to leave a legacy for your children and grandchildren to enjoy? How many beneficiaries are you looking to nominate? How many assets do you have in your property portfolio? Will the benefits outweigh the cost transfer duties? The answers to these questions will be different for each individual... However, if you need some advice on where to start, get in touch with our licensed property professionals today.
Author: Paul Wasson
