Before purchasing a property in the name of a trust there are a few vital points to consider.
In South Africa, there are two types of trusts that are generally used. The first is an ‘Inter-vivos trust’ which is created during the lifetime of the founder. The second is a ‘mortis causa’ trust, which is a trust that is created in the terms of a will and comes into effect after the death of the testator/testatrix.
A trust is a great mechanism for asset protection and protection of the interest of the beneficiaries that have been named in a trust. In addition, should immovable property be registered in the name of the trust and the founder or the trustees of the trust becomes insolvent, such asset(s) generally would not form part of their estate and as such the asset(s) will not be able to be attached by any creditors.
However, before property can be purchased in the name of the trust, the trust needs to first be registered with the relevant Master of the High Court of South Africa. Together with the registration of the trust, the trust deed will be registered. The trust deed will govern all acts that the trustees may enter into on behalf of the trust as well as the powers of the trustees.
An example of one such act would be to acquire and dispose of immovable property. The terms of each trust deed will differ depending on the needs of the individual parties and what the trust is to be used for - for example a family trust or a religious trust.
Generally, trustees will be appointed in terms of the trust deed. The trustee(s) fulfill a fiduciary role in carrying out the purpose of the trust and must act in the best interest of the beneficiaries. The founder of the trust and/or beneficiaries of the trust may also act as a trustee provided that they are not the sole trustee of the trust. Once the trust has been registered, the relevant Master of the High Court will issue the trust with a registration number as well as issue letters of authority indicating which individuals are authorised to act on behalf of the trust, i.e. the trustees.
It is of great importance to note that any acts that are entered into by the trustee(s) before the trust is registered and before the letters of authority have been issued by the relevant Master of the High Court, shall be invalid and shall be of no force or effect.
In addition, it is vital to note that there are certain tax implications, depending on what the trust assets are to be used for.
Any income that is derived from the assets of a trust will be taxed at a higher rate compared to income that is derived from the assets which are owned by an individual. The current applicable rate is 41% on the income that is derived. Similarly in respect of capital gains tax, any gain that is derived from the sale of immovable property will also be taxed at a higher rate when comparing it to gains that an individual incurs from the sale of immovable property.
Whilst a trust can be a great mechanism for asset protection, it will not suit everybody’s needs.
Before deciding whether a trust is the best mechanism for your needs, consider contacting one of our attorneys or conveyancers to assist with assessing your needs and if required, the drawing up of the trust deed together with the registration of your trust.
Contact our attorneys in Cape Town, for expert legal advice.
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