Molefe writes: My parents have just retired with three paid-up properties, as well as about a hectare of land in a developing area.
My parents want to establish a family trust, with their children and grandchildren as beneficiaries. I currently stay in one of the houses, for which I pay monthly rent to my parents of R8Â 000. I am married in community of property.
Is the trust our best move, in terms of ensuring the value they have accumulated grows, without being liquidated – considering that part of the trust idea is that we the kids will rent property from the trust?
We are looking to use the properties once they are in the trust as collateral to develop a larger buy-to-rent property portfolio.
Is a trust a suitable vehicle for such a “family business”?
Chanel Kempff, FNB private clients fiduciary specialist replies:
If used and correctly managed a trust is a very useful estate planning tool that could offer a range of benefits ie protection of assets, protection of interest of minor children, ensure continuity for the future generations and in some cases even tax and cost savings.
The management of a trust is highly regulated and requires professional guidance. The answers below illustrate the implications of the trust, but this information is purely for illustrative purposes and is not given as advice and should not be acted on without a detailed consultation.
The transfer of the property will attract transfer duty and can attract donations tax and capital gains tax depending on how you dispose of the property (donation or sale) as well as the capital appreciation on property.
Donations tax: The property you referred to is currently registered in your parents’ name. In order to transfer the property to the trust your parents have two options.
They can either donate the property to the trust, in which case a donations tax liability of 20% on the value of the property will arise. Or they can sell the property to the trust on a loan account, in which case the trust will owe them the sale price of the property. Please note that since your parents and trust is seen as related parties it is important that the transaction takes place at the true market value of the property. The implication of whether the loan will be interest free or interest bearing should also be taken into consideration as the two options have different tax consequences.
Capital gains tax: Furthermore, the transaction could also give rise to a capital gains tax liability depending on the capital growth that has taken place on the value of the property. This is calculated on the difference in the value of the property when your parents acquired it (base cost) and the value of the property when they disposed of it to the trust (market value). The gain is multiplied with the inclusion rate for natural persons (25%), multiplied by the statutory rate (maximum of 40%) applicable — maximum effective rate of 10%.
Transfer duty: Transfer duty will be payable on the market value at which the trust acquires the property and will be calculated in accordance with the latest published transfer duty tables.
Trust — Income tax & Capital gains tax: It is important to mention that a trust is taxed at a flat rate of 40% on income and an effective rate of 20% on capital gains. In lieu of the non-preferential tax rates applicable to trusts and the fact that you have mentioned that you and your family intend to build a property portfolio with the intention of applying it as a family business, the most effective structure might not be to have the property directly owned by the trust.
It is therefore advisable to explore other structures, such as having the property owned by a company which is taxed at 28% on income and 14% on capital gains. The underlying shareholding of the company can be owned by the trust, rendering it a structure suitable for estate planning as well as business planning purposes.
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