Setting up a family Trust

[TheGuy]

Hi Guys

I need a bit of guidance with setting up a family trust or something like that.

The plan is to take my parents property and place it in a trust from me and my sister then I would like to borrow money from the trust to buy another place I can put in the trust and rent out.

What can of trust can I setup and is what I'm trying to do possible?

I know I need to speak to a professional but I would just like some pointers in which direction I should go and what kind of professional can help with this sort of thing.

Thanks

 

[Freaksta]

I'm not a lawyer, but just did trust in my Honours. Basically from what I know, you only get two types of trusts, onE made in life and the other apon death.

Your parents would have to donate the property to the trust or sell it to the trust at market related interest rate, or lower rate, or interest free. This is all very important while your parents are living because in certain cases income from the property will be deemed to be there or yours or the trusts. Can't really go into all the specifics, but this type of thing is also important for tax planning and estate planning. Go see a lawyer and tax consultant!

 

[DJ...]

You need an attorney - it's as simple as that. And you need to understand the tax implications of what you're planning on doing so I'd suggest an accountant (with a solid tax background) sets it up for you. There are no tax benefits to leaving a property in a trust any longer so you need to make sure that your reasons are sound in the first place, as there might be alternatives, but that depends on your personal situation and requirements...

 

[Freaksta]

You need an attorney - it's as simple as that. And you need to understand the tax implications of what you're planning on doing so I'd suggest an accountant (with a solid tax background) sets it up for you. There are no tax benefits to leaving a property in a trust any longer so you need to make sure that your reasons are sound in the first place, as there might be alternatives, but that depends on your personal situation and requirements...

I would disagree with the tax comment there are still benifits, nothing has changed with taxes with regards to trusts.

 

[TheGuy]

Thanks guys is there is specific type of lawyer I should be looking for and what would their going rate be?

 

[SukkaFoo]

Thanks guys is there is specific type of lawyer I should be looking for and what would their going rate be?

With this years budget speech, the minister of finance upped the CGT inclusion rate to 66%, plus there is no primary residence exclusion, so disposing of a property out of a trust is very expensive. As was stated before, donations tax will have to be paid to get the property into the trust, and that won't be pocket change either.

Trusts are expensive...but definitely speak to a lawyer or tax accountant. I remember Matthew Lester saying in a course I did a few years back that your estate needed to be worth more than something like R7m to justify the costs of a trust.

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[AvOk]

I am also interested in a trust. I know I should and I will go see a professional. Can anyone shed more light on the tax pro's/con's? I heard its especially usefull to setup a trust if you already have a property on your name and your wifes name. (tax wise if you are married out of cop) It does however cost more to purchase a property in the trusts name?

 

[AvOk]

With this years budget speech, the minister of finance upped the CGT inclusion rate to 66%, plus there is no primary residence exclusion, so disposing of a property out of a trust is very expensive. As was stated before, donations tax will have to be paid to get the property into the trust, and that won't be pocket change either.

Trusts are expensive...but definitely speak to a lawyer or tax accountant. I remember Matthew Lester saying in a course I did a few years back that your estate needed to be worth more than something like R7m to justify the costs of a trust.

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thanks, that was helpful. can you clarify this part "...the minister of finance upped the CGT inclusion rate to 66%, plus there is no primary residence exclusion"?

 

[TheGuy]

With this years budget speech, the minister of finance upped the CGT inclusion rate to 66%, plus there is no primary residence exclusion, so disposing of a property out of a trust is very expensive. As was stated before, donations tax will have to be paid to get the property into the trust, and that won't be pocket change either.

Trusts are expensive...but definitely speak to a lawyer or tax accountant. I remember Matthew Lester saying in a course I did a few years back that your estate needed to be worth more than something like R7m to justify the costs of a trust.

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Thanks can you recommend another vehicle to place it in so me and my sister can be equal beneficiaries? You can't get CC anymore what about a PTY?

 

[DJ...]

I would disagree with the tax comment there are still benifits, nothing has changed with taxes with regards to trusts.

CGT, single property exclusion etc. The laws have most certainly been changing with regards to property held in a trust...

 

[DJ...]

Thanks can you recommend another vehicle to place it in so me and my sister can be equal beneficiaries? You can't get CC anymore what about a PTY?

Definitely do not hold the property in a company. You will be liable for far more tax in my opinion. Based on your question, I think a trust is the way to go but you really do need to get some professional input based on your personal situation and requirements...

 

[lived666]

Trusts are really not that expensive to set-up, if they were, I wouldn't have one .
Mine was done through http://www.forssman.co.za/, give them a call, you can always go for a free consultation

 

[DJ...]

Thanks guys is there is specific type of lawyer I should be looking for and what would their going rate be?

If you have a good relationship with your accountant he can refer you to someone. All law firms will be able to help you out with the setting up of your trust. It's usually handled by associates and assistants to be honest.

You could use a company like http://www.easytrusts.co.za/ourCosts.html (that's a link to their costs page) but I prefer to work through my lawyer who I know I can trust (as much as one can trust a lawyer). I have heard that your personal banker can help you out with this process too but I haven't gone down this route before...

 

[DJ...]

Trusts are really not that expensive to set-up, if they were, I wouldn't have one .
Mine was done through http://www.forssman.co.za/, give them a call, you can always go for a free consultation

It's not about the setting up of a trust that's at question here. It is the overall cost of ownership that is important to understand...

 

[SukkaFoo]

thanks, that was helpful. can you clarify this part "...the minister of finance upped the CGT inclusion rate to 66%, plus there is no primary residence exclusion"?

When you sell a property, the gain that you make on it is taxable. So if for example you make R100 000 on a property then this would be taxable. Depending on what vehicle it is sold out of (personal, trust, CC, Pty) the amount of this that is included in you taxable income calc will change. For a private indivudual it will be 25% (I think), and for a trust it will be 66%. So, in my example, you would have to include R25k (25%of R100k) in you taxable income, which would then be taxed at your marginal tax rate (based on the tax tables). So say you are on 40%, then you would pay R10k in tax on the sale. If this was a trust, you would have to include 66%, so around R66k in the taxable income of the trust, which in turn would be taxed at 40%, so that R26k. Obviously as the numbers get bigger they get worse. Also, if its the house you live in, then the first R1m of the profits are not taxable, if the property is held in your hands. So in all likelihood most of us wont make R1m on a property for a long time.

Personally I would just ensure that my folks will was very clear on how the property is divided. Unless they are super wealthy, its not going to pay for itself to do the split now. The will can also set up a trust on their death, which if I recall means that donations tax wouldnt have to be paid, but estate duty would be. Like I said, see a pro, though if your folks are comfortably middle class... then I strongly reccomend just getting a will set up, the banks will do it for free as long as you use them as executors (so will most accounting firms, and they could be cheaper)

 

[lived666]

It's not about the setting up of a trust that's at question here. It is the overall cost of ownership that is important to understand...

ahhhh, ok, I will tell you in a week or two, busy concluding the financials for the first year of having the trust!

 

[DJ...]

ahhhh, ok, I will tell you in a week or two, busy concluding the financials for the first year of having the trust!

They too will be minimal. The overheads on a trust are nothing. Get back to us once you've gone through the process of selling and acquiring new assets and declared the tax on it. You then have to compare the same process with holding it in your own name. Personally, since 2010 it has cost more to hold a property in trust than it has for me to hold it in a personal capacity, or to transfer it to a family member. Remember too that spousal transfers are not subject to tax, if applicable to you.

The problems come in now where things like donations tax have increased to 20% and CGT has gone through the roof regarding trusts. And then with CCs removed and the introduction of a withholding dividend tax, it just makes financial sense to hold it in your personal capacity in my opinion. sukkafoo's advice to sort out the will is the best bet if you can...

 

[ice_cubes]

Hi Guys

I need a bit of guidance with setting up a family trust or something like that.

The plan is to take my parents property and place it in a trust from me and my sister then I would like to borrow money from the trust to buy another place I can put in the trust and rent out.

What can of trust can I setup and is what I'm trying to do possible?

I know I need to speak to a professional but I would just like some pointers in which direction I should go and what kind of professional can help with this sort of thing.

Thanks

Its called an Intervivos trust. Here are some of the points to consider as well:
- You & your sister have to be beneficiaries of the trust - this is to make sure that you have access to the trust assets etc.
- You will also need to decide who is the Trustee or if you will be joint trustees.
- There has to be an independent trustee as well. This is to ensure that the trust is not seen as an extension of yourself, but rather as an independent trust free of abuse (used as a tax vehicle to cheat taxes)etc etc.
- Your trust has to have an accountant.

If your parents are selling a primary residence for the first time in their lives, R2mil of the profit will be exempt from tax.

If your intention is to run the trust like a business, then each asset or loan you acquire has to be in the name of the trust. You will need a signed resolution from all the trustees incl the independent trustee.

TAX ISSUES:
All profits/income is taxed BUT remember that a trust also has expenses that are tax deductable. So for example if that house is now in your trusts name, then all the running costs can be deducted for tax.

COSTS:
day to day running costs inlclude independent trustee fees (R200 pm) and accountant fees (R500pm) estimate.

Also note, its not always a good idea to combine debt & assets in one trust, this is to ensure that if one trust suffers a loss & collapses then all the assets are not lost/reposessed.

And, like DJ said, it costs to sell property in a trust.

So my personal opinion: if you buy assets/property in the name of a trust, make sure you are buying to keep (and rent out) not to resell at a profit.

My trusts were done by a company called TREOC.

Hope this helps.

 

[EnT@nGleD]

Sorry I don't have time to look through this thread thoroughly but will try later today.

One thing to take into consideration is that you can vest the income of the trust in the beneficiaries stated in the trust deed (i.e. In the tust deed you can state separately who the income beneficiaries (e.g. renting activities) and the capital beneficiaries (e.g. capital gain on disposal of the property) are. This means that instead of the proceeds being taxed in the hands of the trust they can be taxed in the hands of the beneficiairies i.e. included in their personal taxable income.

Therefore the tax rate changes to the individuals marginal tax rate and the CGT inclusion changes to that of an individual, 33%.

 

[EnT@nGleD]

A slightly more in-depth response:-

I would not go to a lawyer to set up your family trust. A better bet would be an accountant. You can go to a registered auditing and accounting firm and either speak to a partner, experienced trainee or the tax practitioner at the office. Accounting firms deal with lots of trusts and individual partners often act as trustees of these trusts. They are also able to prepare the trust deed and register the trust with the master.

Freaksta is right in that you mainly get two types of trusts:-
A living trust or an "inter-vivos" trust is set up during the person's lifetime.
A Testamentary trust is set up in a will and established only after the person's death when the will goes into effect.

There is a third type of trust called a special trusts but this will not affect you. You will need to set up an inter-vivos trust.

The reason people usually put their properties into trusts is for financial planning. This is to reduce the estate duty upon their death as the properties value would more than likely increase by substantial amounts over their remaining lifetime leaving one to pay large amounts of tax and estate duty that the deceased may not have in cash but in assets which would have to be sold.

You would more than likely set up the trust with your sister and yourself as the income and capital beneficiaries of the trust and place in the trust deed that all income and capital must be distributed 50%/50%.

Your post is not detailed enough to provide reliable advice on the situation you are in but from the gist of it, it sounds like you need to move the first property into the trust to obtain financing for the second property from which you want to earn rentals. Before considering purchasing a second property on bond ensure that you yourself can cover the bond and insurance over and above your existing costs of living. I say this because the monthly rental you receive may not necessarily exceed the bond and insurance payments. Also too many a times has family in business not worked out. Also to find a tenant who regularly pays and maintains the property correctly is hard to come by. The bank will more than likely make you and your sister sign as sureties for the bond.

See above post for my response regarding tax.