3 things to know about buying a property through a trust

1. Trusts require careful tax planning

Trusts are taxed at a default rate of 45%, which sounds expensive. However, with a proper tax plan, your tax can be far more efficient. This is especially true if the beneficiaries of the trust are minors. This is because tax on a trust can be managed through what’s known as the conduit pipe principle. This allows one to move income through a trust to the beneficiaries of that particular trust, where the beneficiaries might be taxed at a lower rate. In the conduit system, it’s the last taxpayer in the line who gets taxed, so it makes sense to channel things so that the last person is the one with the lowest tax rate.

For example, often, if I’m recommending the establishment of a trust to a client, it’s because they want to purchase a property in the name of their children to provide security for them should anything happen to the parents. A trust does exactly this. In the event of a parent’s death, the trustees will administer the assets in the trust until the beneficiaries reach legal age.

Another example is wanting to take care of your pensioner parents. Trusts can be very helpful in these types of circumstances.

2. Banks generally won’t grant a 100% loan to a trust to purchase a property

That doesn’t mean, however, that you can’t buy property through a trust. Banks do extend loans to trusts, as long as the trustees can demonstrate affordability. The trust itself does not need to have a track record, but the trustees do.

It also helps to find and deal with the most knowledgeable person possible at the bank, or to work through an experienced consultant who can assist you with the process and ensure you have all the required documentation in place and your affairs are correctly structured.

3. It’s important to choose your trustees wisely

When you move assets into a trust, they are no longer within your direct control, but the control of the trustees. So, it’s very important to select trustees carefully. For example, if you found the trust and make your spouse a trustee, things can get difficult if you ever get divorced.

Technically, any legal or natural person can be a trustee, unless they are disqualified for any reason (for example, if they are a minor, suffering from any mental illness, deficiency and/or defect, or occupying, whether directly or indirectly, the office of the Master of the High Court).

However, trustees need to be reliable and willing to take responsibility for managing the trust. Ideally, you want to select someone with competence – a skills set that could contribute to the efficiency of trust administration, such as accountant, lawyer or investment specialist. However, you also need to look at the experience of such a trustee, particularly in the sector in which that trust is meant to create wealth. For example, if you were to invest in property sector, you will benefit from selecting a trustee who is experienced in running and administering trusts within the property sector and understands the nuances of the industry, as well as the regulations.

It’s also a legal requirement to have an independent trustee registered for a family business trust. This is somebody who doesn’t stand to benefit from the trust’s assets and someone who isn’t related to the beneficiaries. The idea is that this person can help to ensure there’s credibility in terms of the stewardship of the trust.

If you’d like to find out more about the benefits of trusts, tax structuring or property tax, please get in touch: www.taxedu.co.za,  074 589 6439 or shillyboy@taxedu.co.za.