Buying Property In A Trust: Pros And Cons
Buying a property in a trust has become more and more popular over the last couple of years. A trust can be described as a legal entity in which a person (known as a trustee) administers property separately from his or her own, for the benefit of another person (known as the beneficiary), or for the furtherance of another purpose such as a charity. A trust has contractual capacity and can acquire, hold and dispose of property for the benefit of its nominated beneficiaries.
Trusts are formed and governed in terms of a trust deed, which is a written agreement concluded between the trustees and the founder of the trust. Trusts are further governed and administered in terms of the Trust Property Control Act, 57 of 1988. The trustees will have the capacity to transact on behalf of the trust as soon as they are authorised to do so by the Master of the High Court.
Benefits of buying property in a trust
There are various benefits in buying property in the name of a trust as opposed to buying it in your personal capacity. The foundation for establishing a trust is the separation of ownership, which can provide protection of certain assets and hold certain tax benefits. A trust is a flexible instrument, capable of catering for various changes and uncertainties during a person’s life time.
Since the trust property is not registered in your personal name, the value of your personal estate upon death is smaller which will cause a reduction in estate duty. Should the value of the property increase over time, this growth will be excluded from your personal estate and the capital gains tax payable will be reduced accordingly. Consequently, executor’s fees will also be eliminated with regards to the property held in trust.
Purchasing or transferring property into a trust helps to protect the specific property from one’s creditors. However, it should never be the intention of the founder of a trust to create a trust with the intention of prejudicing creditors, If administered correctly, a trust can provide long term protection of a person’s assets, such as a holiday home or an investment property, against creditors.
Trusts are also useful when it comes to succession planning as property bought in a trust can remain in the trust indefinitely. Consequently, there is no need to transfer the property from the deceased’s estate into the name of the heir which saves unnecessary transfer costs.
Disadvantages of buying property in a trust
On the flip side, buying property through a trust can also have its disadvantages. When trustees want to apply for finance to purchase a property on behalf of the trust, banks may have additional requirements that must be met before a bond will be granted. Furthermore, banks are less likely to grant a 100% bond to a trust and in some instances, can demand a deposit of up to 25%.
All trusts are taxed at an income tax rate of 45%. Consequently, it may be more favourable to purchase property in your individual capacity rather than in a trust as Capital Gains Tax on the growth of the value of the property comes into play once a property is sold.
Trusts are subject to the highest inclusion rate as 80% of the net gain must be included in the trust’s taxable income for the year in which the property is sold. Consequently, trusts are taxed at a maximum effective rate of 36%. On the other hand, individuals are subject to an inclusion rate of 40% and therefore a maximum effective rate of only 18%.
Another difficulty of property being owned in a trust is that the ownership of the property vests in the trustees. Should the founder not also be a trustee of the trust, he will not enjoy control over that property and the trustees will have the power to administer same. It is therefore of fundamental importance that trusts be managed correctly. A trust should always have an independent trustee, maintain proper records and accounts and ensure that the trust is not deemed to be an ‘alter ego’ of the trustees which can lead to the abuse of the trust. Ideally, an attorney will register the trust with the Master’s Office and the attorney himself or herself will act as an independent trustee.
If administered correctly, trusts can be viable instruments used to purchase property in. However, it will depend on the circumstances and individual needs whether it is necessary to buy property in a trust. There are pros and cons and first time buyers are encouraged to purchase their primary residences in their personal capacity. For second and third properties, purchasing same in a trust can make more financial sense and may present more benefits. Always consult an attorney before making a decision to purchase property through a trust.
Daniël van Zyl
Van Zyl Kruger Attorneys