If I put my house in a trust, is it protected from creditors?
I am often asked whether it is wise to put one’s house into a trust. There are two answers – Yes and No.
If you formed the trust mainly to protect assets from your creditors, then you may consider it worthwhile protecting your house in the same way. Be aware that if the house is bonded, then you will have to re-negotiate the bond and that particular creditor (the mortgaging bank) will be on the trust’s side of the firewall, so the house will only be protected from your creditors, not those of the trust itself.
Also, if the house is worth more than the balance of the existing bond, then you will sell that excess value (the so-called equity) to the trust and the trust will then owe you that equity as a debt.
You will be the one paying the bond, so the trust’s debt to you will continue to increase.
The debt must attract interest from the trust and if it doesn’t, the lack of interest will be deemed by SARS to be a donation, every year, by you to the trust and the extent to which your aggregate donations exceed R100 000 a year will be subject to Donations Tax at 20%. So the interest charged will also increase the trusts debt to you.
With the passage of time, the house will increase in value and the trust may be able to re-bond it, thereby raising cash to repay your original loan, but you’ll still have to lend it money to maintain the new bond repayments.
If you should be bankrupt, your creditors will call in the debt and the trust will have to find the cash (by selling the house, perhaps).
All in all, this leads to the probable answer – No
If, on the other hand, the house is not bonded, the result can be different. In this case the trust will owe you the full value of the house at the time that it buys the property. With the passage of time the house will increase in value way beyond the debt that the trust owes you and it is this increase in value that is protected from your creditors, not the original debt that you hold against the trust. Also not protected is the increase in that debt arising from the interest that you charge.
So, in this case, the answer could be a guarded – Yes
In either case, a lot depends on the numbers.