TRUST TO TRUST: Should you place your primary residence in a trust?
Here is a summary of the benefits of a trust owning your primary residence:
Provided you do not establish a trust with the intention of prejudicing creditors, purchasing or transferring a property into a trust helps to protect the specific asset from your creditors.
There is continuity, for both the trust and the property it owns, after your death.
Assets such as farms cannot be divided. By placing these types of assets in a trust, the heirs can be the beneficiaries of the income generated by the assets.
Since the property is not registered in your name, the value of your personal estate upon your death is reduced, thereby reducing your exposure to estate duty.
Remember, however, that any loans created in order to transfer assets from your personal name into the trust will be included as an asset in your estate, unless it is fully repaid upon your death.
There are no executor’s fees on a property owned by a trust. Executor’s fees are usually 3.5percent plus VAT on the gross value (excluding any debt) of your property at the time of your death. If the property is bonded, it could be an effective cost as high as 10percent of the net value of the property.
There is no need to transfer the property from the name of the deceased into the name of his/her heir(s), resulting in savings on capital gains tax.
The punitive provisions on interest-free loans in terms of section 7C of the Income Tax Act excludes loans related to primary residences.
Consider these factors before placing your primary residence in a trust:
In the case of a primary residence, the possibility exists that higher capital gains tax will be payable on the disposal of your residence, due to the loss of the primary residence exclusion (R2 million) for capital gains purposes.
The sale of properties in a trust attracts a higher capital gains tax (36percent) versus individuals (between 7.2percent and 18percent) if the gains are not distributed to beneficiaries.
When a bank lends money to a trust and the trust has little (if any) assets with the exception of the property, then you will either have to sign as surety, or else security in the form of cash will be required.
Upon your death the bank might put in a claim, and if the estate does not have sufficient equity, the bank has the power to sell the property in order to settle the outstanding bond. The larger the outstanding debt, the greater the risk that the trust will not protect this asset against a creditor, in this case the bank.
Other assets that may form part of the trust may be at risk of exposure too.
In view of the fact that trustees cannot enter into agreements until they have been issued with Letters of Authority by the Master, it should be noted that no person may enter into an agreement “on behalf of a trust to be formed”.
Any offer to purchase or agreement of sale signed by trustees before they have been appointed in writing by the Master (and a Letters of Authority has been issued) is void and unenforceable.
It is important to ascertain from the trust deed whether the trustees have the power to buy and sell property on behalf of the trust.
In situations where the trust requires a mortgage bond, the power of the trustees to mortgage trust property must be specifically provided for in the trust deed. The trust deed also stipulates how the decisions of trustees are to be taken.
Trustees always have to ensure that the required number of trustees are in office as required in the trust deed, and that decisions are properly taken and documented.
If only one trustee is going to sign the agreement of sale and/or the conveyancing documents required to give effect to the transfer of the property, he/she must be authorised to do so by a resolution that has been signed by all the other trustees.
An asset register must be kept of each property acquired in a trust. Any repairs, maintenance, insurance or other bills, such as water and rates and taxes, will be for the trust’s account. It is accepted practice that if the beneficiaries stay in the house for free, they must pay for these costs.
Van der Spuy is a registered Fiduciary Practitioner of South Africa® and the founder of Trusteeze®, which specialises in trust administration.