Trusts a viable option for South African property owners

It is common perception that trusts are only for the very wealthy, but many property owners could benefit from placing their property into a trust and protect one of their most valuable assets as well as future income of their family.

“While giving up ownership of your property may appear to be a scary concept a trust ensures that the property is well out of the clutches of creditors as it is the only entity that benefits from total asset protection,” says Ian McDonald national manager of financial planning at ooba (formerly MortgageSA).

“The property owner can still enjoy the benefits of the property such as rental income or as a residential home but without the risk.

“Another major benefit, and one of the main reasons for setting up a trust is that the property no longer falls into your personal estate and the property is not subject to inheritance tax,” states McDonald.

“The ownership and benefits are passed onto your family quickly and without complex tax issues.”

InSouth Africa, minors are not allowed to inherit any assets therefore a trust protects your children if something should happen. The trustees will administer the assets in the trust until such time as the beneficiaries reach a certain age, inSouth Africa this is usually 25 years old.

It also does away with the need for an estate executor. An executor is entitled to a maximum of 3.7% of the estate’s value and is responsible for winding up and administration of a decreased estate, taking control of assets, settling liabilities and distributing the net assets in terms of the will.

But, trust’s are not without complications and potential problems with trustees and high tax rates need to be carefully considered.

“Property owners need to be aware that they are transferring the control of the property out of their direct control,” cautions McDonald. “The most typical problem with trusts is when the relationship between the founder and trustee goes sour, this can happen during divorce or other family disputes.”

Disputes such as these can result in the beneficiaries not having access to the income or benefits.

“The founder needs to carefully choose the trustees and weigh up the chances of any disputes against the other benefits of the trust and consider carefully whether a trust is the best vehicle,” says McDonald.

“Also, another potential disincentive is that the transfer duty when a trust acquires an immovable property is higher than an individual’s rate, at a rate of 10%,” states McDonald.

Since 1991 trusts are subject to taxation. Income not distributed to beneficiaries is taxed at a flat rate of 40%.

“Another potential deterrent when considering forming a trust is that they attract the highest capital gains tax,” says McDonald. “50% of all profits on sale of trust assets are included in the trust’s taxable income and taxed at the rate of 40%, resulting in a net capital gains tax cost of 20% of the capital gain.”

Once deciding that a trust is the best vehicle for your property the founder will need to draw up a trust Deed that clearly defines the trust’s objectives and beneficiaries and register it with the Master of the High Court.

“The Master will require full details, ID and banking details of the trustees and then the Master will decided whether security needs to be furnished by the trustees or not.”

The trustees will only be allowed to act as trustees if authorised in writing by the Master of the High Court and the beneficiaries must be clearly outlined.

All South African property owners are entitled to place their assets in a trust ensuring the property is entirely protected from the grasp of creditors and benefiting the property owner’s family in the event of their death. But, property owners need to be aware of the potential shortfalls when creating a trust which can include disagreements between the trustees and high rates of taxation.

It also does away with the need for an estate executor. An executor is entitled to a maximum of 3.7% of the estate’s value and is responsible for winding up and administration of a decreased estate, taking control of assets, settling liabilities and distributing the net assets in terms of the will.

But, trust’s are not without complications and potential problems with trustees and high tax rates need to be carefully considered.

“Property owners need to be aware that they are transferring the control of the property out of their direct control,” cautions McDonald. “The most typical problem with trusts is when the relationship between the founder and trustee goes sour, this can happen during divorce or other family disputes.”

Disputes such as these can result in the beneficiaries not having access to the income or benefits.

“The founder needs to carefully choose the trustees and weigh up the chances of any disputes against the other benefits of the trust and consider carefully whether a trust is the best vehicle,” says McDonald.

“Also, another potential disincentive is that the transfer duty when a trust acquires an immovable property is higher than an individual’s rate, at a rate of 10%,” states McDonald.

Since 1991 trusts are subject to taxation. Income not distributed to beneficiaries is taxed at a flat rate of 40%.

“Another potential deterrent when considering forming a trust is that they attract the highest capital gains tax,” says McDonald. “50% of all profits on sale of trust assets are included in the trust’s taxable income and taxed at the rate of 40%, resulting in a net capital gains tax cost of 20% of the capital gain.”

Once deciding that a trust is the best vehicle for your property the founder will need to draw up a trust Deed that clearly defines the trust’s objectives and beneficiaries and register it with the Master of the High Court.

“The Master will require full details, ID and banking details of the trustees and then the Master will decided whether security needs to be furnished by the trustees or not.”

The trustees will only be allowed to act as trustees if authorised in writing by the Master of the High Court and the beneficiaries must be clearly outlined.

All South African property owners are entitled to place their assets in a trust ensuring the property is entirely protected from the grasp of creditors and benefiting the property owner’s family in the event of their death. But, property owners need to be aware of the potential shortfalls when creating a trust which can include disagreements between the trustees and high rates of taxation.

It also does away with the need for an estate executor. An executor is entitled to a maximum of 3.7% of the estate’s value and is responsible for winding up and administration of a decreased estate, taking control of assets, settling liabilities and distributing the net assets in terms of the will.

But, trust’s are not without complications and potential problems with trustees and high tax rates need to be carefully considered.

“Property owners need to be aware that they are transferring the control of the property out of their direct control,” cautions McDonald. “The most typical problem with trusts is when the relationship between the founder and trustee goes sour, this can happen during divorce or other family disputes.”

Disputes such as these can result in the beneficiaries not having access to the income or benefits.

“The founder needs to carefully choose the trustees and weigh up the chances of any disputes against the other benefits of the trust and consider carefully whether a trust is the best vehicle,” says McDonald.

“Also, another potential disincentive is that the transfer duty when a trust acquires an immovable property is higher than an individual’s rate, at a rate of 10%,” states McDonald.

Since 1991 trusts are subject to taxation. Income not distributed to beneficiaries is taxed at a flat rate of 40%.

“Another potential deterrent when considering forming a trust is that they attract the highest capital gains tax,” says McDonald. “50% of all profits on sale of trust assets are included in the trust’s taxable income and taxed at the rate of 40%, resulting in a net capital gains tax cost of 20% of the capital gain.”

Once deciding that a trust is the best vehicle for your property the founder will need to draw up a trust Deed that clearly defines the trust’s objectives and beneficiaries and register it with the Master of the High Court.

“The Master will require full details, ID and banking details of the trustees and then the Master will decided whether security needs to be furnished by the trustees or not.”

The trustees will only be allowed to act as trustees if authorised in writing by the Master of the High Court and the beneficiaries must be clearly outlined.

All South African property owners are entitled to place their assets in a trust ensuring the property is entirely protected from the grasp of creditors and benefiting the property owner’s family in the event of their death. But, property owners need to be aware of the potential shortfalls when creating a trust which can include disagreements between the trustees and high rates of taxation.

It also does away with the need for an estate executor. An executor is entitled to a maximum of 3.7% of the estate’s value and is responsible for winding up and administration of a decreased estate, taking control of assets, settling liabilities and distributing the net assets in terms of the will.

But, trust’s are not without complications and potential problems with trustees and high tax rates need to be carefully considered.

“Property owners need to be aware that they are transferring the control of the property out of their direct control,” cautions McDonald. “The most typical problem with trusts is when the relationship between the founder and trustee goes sour, this can happen during divorce or other family disputes.”

Disputes such as these can result in the beneficiaries not having access to the income or benefits.

“The founder needs to carefully choose the trustees and weigh up the chances of any disputes against the other benefits of the trust and consider carefully whether a trust is the best vehicle,” says McDonald.

“Also, another potential disincentive is that the transfer duty when a trust acquires an immovable property is higher than an individual’s rate, at a rate of 10%,” states McDonald.

Since 1991 trusts are subject to taxation. Income not distributed to beneficiaries is taxed at a flat rate of 40%.

“Another potential deterrent when considering forming a trust is that they attract the highest capital gains tax,” says McDonald. “50% of all profits on sale of trust assets are included in the trust’s taxable income and taxed at the rate of 40%, resulting in a net capital gains tax cost of 20% of the capital gain.”

Once deciding that a trust is the best vehicle for your property the founder will need to draw up a trust Deed that clearly defines the trust’s objectives and beneficiaries and register it with the Master of the High Court.

“The Master will require full details, ID and banking details of the trustees and then the Master will decided whether security needs to be furnished by the trustees or not.”

The trustees will only be allowed to act as trustees if authorised in writing by the Master of the High Court and the beneficiaries must be clearly outlined.

All South African property owners are entitled to place their assets in a trust ensuring the property is entirely protected from the grasp of creditors and benefiting the property owner’s family in the event of their death. But, property owners need to be aware of the potential shortfalls when creating a trust which can include disagreements between the trustees and high rates of taxation.