Advantages and Disadvantages of buying property through a Trust

A Trust is a legal entity created by a trust founder which can be used to purchase and own property. Once a trust is created, all assets are placed into the trust by either the trust founder donating the assets to the trust or the trust buying the assets.

While the cost of starting a trust can be significant, purchasing a property through a trust has certain advantages that many feel outweigh the cost. If the assets are donated to the trust, a donation tax will need to be paid based on the value of the assets. If the trust purchases the assets, a transfer duty will be applicable.

With the costs involved in setting up a trust, why do some people still use this entity to purchase property?

A trust is often used to protect the assets and ensure that the appointed beneficiaries, which are more often than not the trust founder’s children, get the benefit of using the assets if something happens to the founder. Therefore as soon as the trust is formed and the assets are transferred out of the founder’s name, the founder is no longer the owner of those assets but the trust itself is. Basically what this means is that if the founder passes away, the assets in the trust will not form a part of the founder’s deceased estate, and will therefore not be used in the calculation of estate duty.

The assets within the trust can also not be attached should the founder become insolvent, provided the stipulated period has lapsed. A period of six months must elapse if the founder was solvent at the time of the transfer of assets, or up to two years in the case of insolvency. A trust is therefore, an excellent way to protect the assets by ensuring the beneficiaries get the future use out of them while avoiding paying estate duty on the value of the assets.

Another important fact about buying property through a trust is that when the trustees wish to purchase additional property, the property will be registered in the name of the trust and not the trustees. If the purchase of the property needs to be financed by a bank then the trustees must have the authority to purchase property in the name of the trust, borrow money for the purpose of buying property and have the authority to use the trust assets as security for the liability of the trust.

While there are advantages to using a trust to purchase and own property as mentioned above, there are also disadvantages.

Due to the fact that the founder is no longer the owner of the assets, he or she does not have sole control over these assets anymore. The founder has to appoint trustees to manage the trust and its assets in the trust deed. In some cases these trustees will be the founder’s attorney or accountant.

However there are instances where the founder appoints him/herself, along with their spouse, as the trustees. Since the duty of the trustees is to manage the assets in accordance with the terms and provisions of the trust deed and for the benefit and best interest of the beneficiaries, many Trusts are set up in this way so that the founder can have a real say in the management of the trust. If the management of the trust is clearly in the control of the founder/his/her spouse however, our Revenue Authorities will consider treating the trust as a vehicle of convenience, and will treat the trust assets and all income derived therefrom as vesting in the said founder

It is important to understand the tax implications of forming a trust, and how it differs from those of an individual. In most cases, a trust will pay a higher tax rate than an individual taxpayer. Any income received by the trust will be taxed at 41% per annum, and no rebates apply to trusts. A trust will also incur Capital Gains Tax on any capital profit that it makes, which will be charged at a higher rate than that of an individual.

However on the plus side, the rate a trust pays on Capital Gains Tax is lower than the rate of estate duty.

Therefore if you are considering forming a trust you should consult with a professional financial adviser or an attorney in order to get as much information as possible cleared.

As while a trust can be a highly effective way to manage and protect assets it however will not suit everybody’s needs as a financial adviser or attorney will be able to explain all the implications and assess whether it is the preferable route based on your individual personal criteria.

By: Randles Attorneys

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