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Should my mom purchase a retirement property using a trust?

The decision will have to take into account various factors particular to both the individual and the larger family.

My mother is planning on purchasing a retirement property in a retirement village. Her aim is to live there. Would you recommend the family create a trust and for her to place the property in the trust; for her to buy the property via the trust, or to purchase in her personal name? Her intention is to pass the property on to me.

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The purchase of fixed property is always a good prompt to look at one’s estate planning. A decision whether or not to use a trust when purchasing the retirement property will have to take into account various factors particular to both the individual and the larger family. As such, I will limit my answer to some of the factors you should consider when making a decision.

To start, it is important to understand the structure of a trust which applies to all the different types of trusts that are recognised in South Africa. A trust is set up by the settlor who determines why the trust is in existence. The settlor places assets into the trust by way of sale, a donation (an inter vivos trust) or bequest (a testamentary trust). Once the assets are in the trust, the settlor no longer has ownership of the assets and ownership vests in the trustees, not in their personal capacities but in their capacity as trustees. One exception to this is a bewind trust which is a type of trust where the beneficiaries receive ownership of the assets.

Through the trust deed, the settlor also appoints the initial trustees of the trust. It is the role of the trustees to administer the assets of the trust according to the rules set out in the trust deed. The trust deed can give the trustees discretion in distributing the income and capital of the trust (discretionary trust) or it can stipulate how the income and capital must be distributed (vesting trust).

With a clear understanding of the trust structure, the next consideration is to determine the benefits of using a trust. In essence, trusts are utilised to provide asset protection by placing the management and administration of the trust assets in the hands of trustees. An example would be where the beneficiaries of the trust are unable to perform these functions due to their age or as a result of a mental or physical disability. Trusts can also be effectively used to provide continuity over multiple generations. Due to ownership of the trust assets vesting in the trustees in their capacity as such, the death of one of the beneficiaries or trustees does not result in the trust assets having to change ownership. The trust assets remain outside of the deceased’s estate and are not included in the winding-up process.

It is also worth noting that there are additional requirements and expenses to consider when setting up a trust such as who the trustees would be, the cost implications of such appointments, and additional financial, tax and administrative reporting requirements. You will also need to consider that setting up a trust involves giving up personal control over the assets.

Taking the above into account, before deciding to purchase a retirement property in a trust, you may also want to consider:

  • Do you foresee that your mother will require assistance in managing or administering the property herself?
  • Would her estate benefit from a cost-saving by purchasing the property in trust? When determining this, you will need to bear in mind:
  • Only the growth in the value of the property from the date of purchase until the date of her death would be excluded as she would be required to lend the funds to the trust to purchase the property.
  • What is the value of your mother’s net estate? For estate duty purposes, the first R3.5 million of her net estate would be exempt from estate duty. If she had a spouse who passed away before her and left her his full estate, this exempt portion will increase to R7 million.
  • From a capital gains tax perspective, your mother would lose her primary residence exclusion if the property is held in a trust as opposed to in her personal capacity.
  • If the property is purchased in a trust, it would not be included in the winding-up process of her deceased estate, resulting in a saving on executor’s fees as well as the subsequent transfer cost payable to the attorney attending to the transfer. This saving would need to be weighed up against the additional costs of administering the trust as discussed above.

In addition to the points above, the specific tax treatment of a trust also needs to be taken into account. From an income tax point of view, a trust (other than a special trust) is taxed at a flat rate of 45% on all taxable income not distributed to beneficiaries. A trust also does not qualify for any interest exemption. Any capital gain retained in the trust is also taxed at a much higher rate than that of an individual, i.e. 80% of all capital gains are included in the trust’s taxable income for the year which is taxed at a flat rate of 45%. This result is an effective capital gains tax rate of 36%.

A trust also does not qualify for the annual capital gains tax exclusion of R40 000 afforded to individuals. An individual’s highest effective capital gains tax rate is 18% on gains above R40 000 per year.

From the above, it should be clear that when considering the use of a trust to purchase the retirement property your individual circumstances will determine the best option. It is always best to consult with an estate planning professional to guide you through this process.


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