As one of your most valuable assets, it’s natural to want to protect your house. Some people do this by putting it in a trust. Is this the right thing to do?
Buyisile Maseko, growth head of FNB Home Finance, has answers.
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What is a trust?
There are two types of trusts, inter vivos or living trusts, and testamentary trusts which are also known as trusts mortis causa.
An inter vivos trust is an entity which is formed when a person known as a founder, settler, or donor formalises a written document known as a trust deed in terms of which they agree to transfer certain assets during their lifetime to one or more office holders known as trustees. These trustees are bound to administer the assets in terms of the provisions of the trust deed.
A testamentary trust is created in terms of the will of a deceased person. This person, known as a testator, leaves assets in their will to the trustees also nominated in terms of the will and stipulates the terms and conditions which will apply to the trust.
However, this trust does not come into existence until the death of the person concerned and then only if the reason for which the testator intended the trust to be set up actually exists. For example, a trust will not be created where a testator has stipulated in the will that any inheritance which is due to a child under a certain age should be held in a trust but on the death of the testator, there are no children under that age to inherit.
When should you consider putting your house in a trust?
You should consider putting your house in a trust if:
- You intend to protect your property assets for minor children or other beneficiaries in the event of your death;
- You want to reduce the amount of estate duty which may be payable by your estate on your death;
- You want to protect your assets in the event of insolvency.
What are the benefits of putting your house in a trust?
Any asset owned by the trust will not form part of the founder’s personal portfolio which means it cannot be attached by creditors should the founder become insolvent.
Furthermore, the assets in the trust will not form part of the founder’s deceased estate and will not be liable for estate duty because there is no need to transfer the property to the heir when the estate of the founder is being wound up.
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There are some benefits of placing your house in a trust, but it’s a personal preference that should be discussed with your bank or attorney. As with any benefits, there are converse effects, which are dependent on circumstances and the intended purpose of the trust. A trust generally comprises of a founder; the trustees, who administer the trust’s property; and the beneficiaries for whose benefit the trust was initially created.
Some of the benefits of placing your house in a trust include:
- A trust lives on in “perpetual succession”, which means that it naturally facilitates estate planning. The costs associated with the death of an owner on a personal estate is not applied (i.e. transfer duties, executor or conveyances fees of the trust). This can save time and legal fees as it does not have to be transferred to a new name.
- All costs associated with the property are shared amongst all the trustees of the trust.
- The property is not in your personal estate but is registered in a trust, protecting it from creditors.
- Trustees may distribute rental profits to beneficiaries.
- Estate duty could be reduced if your property is registered in a trust as opposed to your individual name.
What are the most important things to consider?
A founder is technically no longer in control of the trust assets, as they're not the owner anymore. Trustees are appointed to manage the entity and its assets. These assets are thus controlled by the trustees whose powers will be limited and defined in the trust deed. Their control will also be limited depending on whether or not it’s a vesting or discretionary trust.
The setup and administration costs involved with a trust should be considered as this could be costly, as well as the documentation that your bank may require.
Banks may require some form of security or surety to grant 100% bonds on trusts. Granting of applications also means that each of the trustees may be required to submit their financial information.
There are also certain tax implications that need to be considered when it comes to trusts. Trust instruments pay a higher tax than individuals and any income received by a trust is taxed at 45% per annum, with no rebates applicable.
Capital Gains Tax is incurred on any capital interest earned by the trust, which is charged at a higher rate than that of an individual but is fortunately still lower than the estate duty rate.
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