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Detailed benefits of using a Trust in Property Investing

Detailed benefits of using a Trust in Property Investing

Trusts Benefits

Trusts offer a wide range of benefits. Key among them is Asset Protection! In fact this is by far the largest benefits that Trusts offer as entities. The following list of benefits is not exhaustive but includes the most important and obvious ones.

Asset Protection

One of the aspects of this seminar is to highlight the exposure the individual assumes once you enter into business or the property market, the vagaries of business, such as damages, employees, financiers, landlords, business creditors, sureties, claims, financial damages etc. In order to alleviate this problem the individual needs to place their assets in a Trust. This protects the assets against risk from all potential claims and creditors, including SARS.

Divorce

The current statistics indicate a high rate of divorce in this country. The reality is that this is highly probable. One should bear in mind that a Spouse could be your biggest creditor in the event of the relationship ending. By placing all ones assets in a Trust, in the event of a divorce the assets will be secure from any claims ancillary to the divorce.

Business creditors

If the business is conducted as a Sole Proprietorship or Partnership all the creditors of the business are the creditors of the individuals conducting that business. These business creditors can attach all your personal assets to satisfy any claims due to them. In many instances claims may arise by default or due to no fault or cause of the individual, such as the death, sequestration, or default by the individual’s business Partner, or a claim by an employee against the business, or SARS for taxes due which your accountants failed to reflect, or an employee causing damages or losses and as a result a claim emanates which becomes the responsibility of the business, etc.

Further claims by the following third parties may emanate;

  • Yours and your business financiers and bankers.
  • Landlords;
  • Statutory bodies such as municipalities, UIF, SARS;
  • General creditors;
  • Personal Accounts Payable;
  • Personal claims;
  • Repudiated and unpaid Insurance claims;
  • Sureties.

Benefits on Death

No Capital Gains on death

Capital Gains Tax is a tax levied on the event of the disposal of an asset. There are also certain deeming provisions, even though an asset or assets have not been disposed of. The death of an individual is such a deemed event. The deceased is deemed to have disposed of their estate to the deceased estate and this triggers the tax on all assets (there are certain exemptions and rollovers) which have increased in value since October 2001, or assets acquired after October 2001 that have increased in value. By having the assets in a Trust this will be avoided.

This deeming event triggers the tax which is payable even though no consideration has been received. This places the estate in extreme dire straits.

No estate duty

On the death of an individual an estate duty is due on the net value of all assets in excess of the abatement amount. The abatement amount, which is stipulated in the Estate Duties Act, allows for a certain amount of your personal estate to be free of any duties when determining the liability of the deceased estate for estate duties. This form of tax is 20% of your net estate in excess of R 3 500 000.00. Whilst this is a very generous amendment, R 3 500 000.00 is not an ambitious goal to aspire to in the future. Therefore all amounts exceeding this figure will be taxed at 20%. Effectively this is a tax on after tax assets and cash and investments!! By having a Trust in place this is avoided.

Estate Duty is also levied on non-resident persons owning any property in RSA. Property is widely defined to be any asset, movable, immovable, investment policies, and interest in any asset and or business interests.

It is very important to note that there are also deeming provisions in the Estate Duties Act, which will render certain assets to be property of the deceased for estate duty purposes, even though the deceased does not own the assets. The ambit of the clause is very wide and the parameters are set out at clause 3 of the Estate Duties Act. A few examples are usufructary and fiduciary rights, certain annuities, interests in property, assurance policies and insurance policies.

It is critical to establish the correct structure in order to ensure that an individual pays a minimal amount, if not zero death duty. An average estate will pay approx 30% of any net values of such estate. All assets, business (huge value) properties, movable assets, investments, cash, Unit Trusts, shares, time share, deemed assets, etc. All of these assets are valued and will form part of the estate of the individual, after deductions of debts and certain exemptions have been deducted, and will be taxed at the mentioned rate of 20% of the estate in excess of 3.5 million rand.

The solution to this frightening proposition is simple, by establishing Trusts and ensuring that all the assets are held by Trust, the Trust never dies, our law allows for the Trust to continue in perpetuity. On the death of the individual they should pay zero estate duties.

No executor’s fees

On the death of an individual an executor is appointed to wind up the estate, the executor/executrix will receive a maximum fee of 3.5% plus VAT, the equivalent of just under 4% of the GROSS value of your estate. By placing assets in a Trust, this can be avoided. Whilst this is a small percentage it results in a large amount being paid out of the estate. The fee can be set lower. However none, if very few professionals will act for less than the fee stipulated in the act.

No costs on death

There are a number of other costs on death such as, costs to cancel bonds as the estate can not be wound up if there is any debt in the estate.

If the individual wishes to have a Beneficiary/Heir inherit the property they will have to take transfer of the property which entails the payments of transfer costs. As in most instances the Heirs/Beneficiaries do not tend to have the funds or liquidity to pay same. This usually results in the estate paying same and reducing the Heirs benefits and entitlement. Assets in Trust will ensure these costs are minimised.

Protection of minors

Our law does not allow for minors to directly inherit, as they do not have contractual capacity. An individual who wants to leave all assets to minor persons will not be able to do so, or persons not adequately addressing the issue in their Will end up with a situation where all the assets must be liquidated into cash, on their death, as the Guardians Fund does not administer assets other than cash. The Guardians Fund, which can only hold cash and pays a very low interest, approx 2 %. This is absurd when comparing the returns that can be achieved by merely investing the cash or the growth achievable on property, business or other assets. In the event monies are not claimed, the funds are forfeited to the state for good measure.

In the interim they will have limited or no access to the funds for their needs, education, health, well being, housing, etc.

Your dream of passing on your business or property portfolio to your children is impossible as the Guardians Fund can only hold cash.

The solution is to have all the properties in a Trust which survives the death of an individual and any Beneficiary may benefit and access immediately. Also bear in mind that property administered by your appointed Trustees will accrue at a much better rate than Guardians Fund at 2% plus inflation. On the event of the vesting of assets or entitlement to benefits they will have access to great business or property portfolio.

 

Estate Freezing

On the death of any individual, their estate is frozen, this transpires in order for the executor to wind up the estate, i.e collect assets, pay debts, taxes, and only after that to make our bequests and then distribute benefits to the Beneficiaries/Heirs. All the while the Spouse and dependants of the deceased have no access to any monies or assets. A complex estate could take numerous years to wind up, sometimes up to between 2-5 years, or longer.

This needs to be contrasted with the position where the Trust owns the assets and cash, which is then immediately available and immediately accessible versus a situation where the individual dies, and all the assets and cash are tied up in the winding up process, causing undue hardships to a Spouse and dependants.

Continuity

In the event that the individual does not or has not structured their affairs and interests, this creates serious problems, as the assets, cash, business interests and property portfolio may not continue after the death of the individual. In the event that there is immovable property or a property portfolio, this will cease and have to be liquidated, as all bonds need to be settled. A business which is not properly structured will come to a grinding halt.

When calculating the taxes along with the costs on death, as listed above, the estate is usually depleted and not much will be left over, as most assets will end up being sold on auction or sold at far below their market value to ensure a quick sale, so as to wind up the estate.

This is totally defeating the objective of creating wealth and establishing and running a business or a property portfolio that will continue to deliver benefits to the individual and their Spouse and dependants after their death.

We re-iterate that there is no necessity for a Trust to terminate. A Trust does not die and can therefore continue in perpetuity. This allows for the continuation of the assets, business interests, accrued wealth and property portfolio which allows for future generations to benefit from your efforts which will be shielded from costs on death, no transfer, no cancellation of bonds, there is no Estate Duty CGT or executors fees. There is no need to liquidate assets to cover costs of death.

Succession planning

Trusts allow for the best mode of succession planning as the South African Trust Law allows for Trust to continue in perpetuity.

A word of advice, we suggest that a properly drafted Will be executed in order to ensure that the individual does not die intestate.

The Will also allows the individual to capitalise on various estate duty exemptions, transfer duty benefits and certain tax relief.

Section 4 q and the Section 4 A abatement benefits must be capitalised.

Letter of Wishes

This is a letter which can be drafted by the Founder as a guide to the Trustees as the Founder’s wishes as to how the assets are to be dealt with after the death or incapacity of the Founder.

It usurps the function of a Will to a degree and sets out how specific assets are to be dealt with.

It is crucial that the letter acts as a guide and is not peremptory as this could be seen as control and result in the loss of benefits.

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