Property trusts: When they're a bad thing

11 Feb 2009

If you have a special reason for registering your property in a trust I would never attempt to dissuade you. For example if you lead a complicated financial lifestyle owning lots of different businesses, trading in properties, having a real need to provide a safe haven for disabled children. But most of us live fairly straight forwards lives and have no real need of this type of ownership.

The real purpose of a trust in most cases is safe guard your properties from creditors if you have financial problems. But how many people not having complicated financial lives do you know that have gone bankrupt? For me a real problem is that if you form a trust and want to bond a property then you still have to give personal surety - thus nullifying the supposed advantages of a trust.
For me two of the largest disadvantages of trusts and other forms of non-natural ownership are the additional transfer costs and Capital Gains Tax differences. For example a R500 000 property will cost R8 634 to transfer privately and R48 634 to transfer into a trust! Equivalent to R640,41 pm addition on your bond if your finance the difference!

The effective Capital Gain Tax rates for individuals lies between 0 & 10% depending on your total income package, while that for a CC will be 14%. Trusts are effectively 20% of your capital profit. If you live in a property registered in your own name you can claim a R1 500 000 allowance.

I really believe that other options simply cost you too much more to be viable unless you have a special need.

Remember that you have to be very careful when changing trustee and beneficiaries as this can easily be construed as disposal of the property. You will be then be liable for transfer duty and payment of CGT if the receiver sees this as a change of ownership. Some people keep property in trust for their children but once they are over 21 it does not make sense to me to limit how they can deal in property that they effectively own. I have had experiences where outside and even family trustees can make life very difficult and un-profitable for the beneficiaries.
Trusts have their place but you must be very sure that a trust is the right vehicle for you.

Article published by Realestaeweb.co.za