How do I move my properties into a trust?
This is one of the most frequently asked questions during my many Teams meetings. So, here’s the answer. I’ll talk as if you only have one property to deal with.
You have to choose between donating the property or selling it. There’s no other way.
If you donate it, you’re in for 20% Donations Tax.
The only advantage is that you will have moved its value out of your estate and away from your creditors. You can’t do this to escape creditors whom you know are already proceeding against you.
Your alternative is to sell it, but the trust has no money, so it will owe you the selling price.
Your creditors can then go after that debt, so you will have achieved no protection in the short term. However, you can gradually reduce that debt by donating R150K each tax year. You don’t pay the R150K, but simply owe it to the trust. You can then write a set-off agreement and set the R150K off what the trust owes you. This is not a forgiveness of debt, so is not subject to CGT (despite what many “experts” will tell you).
Over time, the property increases in value but the debt doesn’t, so the trust protects the growth in the property’s value from your creditors and from the taxes on death.
Note that if it is rental property, then you want the trust (taxed at 45%) to own a company (taxed at 27%), which in turn, will own the property.
Also, be aware that all the time the trust (or company) owes you money, you must charge interest at least at the official rate. This leads to some rather colourful consquences which I have dealt with in another post.
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Does this structure also make sense if the investment is in the stock market and other financial instruments rather than property?
Given the cost of maintaining 2 entities (company & trust), is there a ball park threshold asset value below which having just a trust makes financial sense.
Presumably this threshold depends on whether the strategy is to maximize accumulation in the structure or there a need to make some distributions to beneficiaries?
I know little about the stock market and financial instruments, but they are also growth assets, so yes.
The additional maintenance cost of a trust is only one Nil tax return per year, which most people can do themselves. Plus, optionally, an independent professional trusteee’s fees if the assets are to be protected from the founder’s creditors.
The alternative of building wealth in a company of which you are the shareholder is the worst structure that I have some across. It leads to a Double CGT Trap.
My take on trusts is that they are for building wealth and their structure provides three (four, if we write the Trust Deed) significant benefits over others. The most common reason to distribute income to beneficiaries is to save tax by income splitting. That defeats the object of wealth building, and risks of falling foul of s7 and s80A of the Income Tax Act.
The structure (trust owns the company which owns & operates assets) makes sense when accumulating value in the structure.
When you want / need to make distributions to beneficiaries:
1) Company distributes a dividend to the trust (subject to 20% DWT). The trust can retain & capitalize the dividend in the trust or distribute it tax free to beneficiaries.
2) (Free cash permitting) the company can repay part of the loan to the person who made the loan. The repayment is not taxable.
Again, pretty straightforward Dave, but read Step 14 “Retirement” in my book “16 Steps to Wealth” here http://www.16steps.co.za