A trust is a juridical entity that serves to safeguard the assets of its creator for the ultimate advantage of the beneficiaries. The creator entrusts the management and administration of these assets to a trustee, who acts in accordance with the terms of the trust for the benefit of one or more designated recipients.
Pros:
The utilization of a trust as a vehicle for holding property offers several advantages, including:
- Perpetual succession, rendering the trust immune to estate duty, transfer duty, executor's or conveyancer's fees, or capital gains tax that may be incurred upon the death of an owner.
- Creditor protection, as the property registered in the trust is insulated from creditors as it is not considered a part of the personal estate.
- Continuity, as the trust and the property registered therein are not affected by the death of the creator.
- Simplified management, as the income from the trust's property and expenses such as repairs, maintenance, water, and rates bills are for the trust's account.
- Reduced estate duty exposure, as the value of the personal estate is reduced by holding property in a trust rather than in one's own name.
- Tax efficiency, as trustees have the authority to distribute rental profits to beneficiaries, thus minimizing the overall tax position, with the tax ultimately paid at the beneficiaries' marginal rate, even though trusts are taxed at the top marginal rate.
Cons:
The utilization of a trust as a vehicle for holding property also presents certain drawbacks, including:
- Incurring setup and administration costs associated with establishing and maintaining the trust.
- The potential for problems to arise if the trust is not properly established or managed.
- Incurring additional tax compliance costs, as the trust is considered a separate taxpayer and is required to file its own tax return.
- The requirement to charge interest at the South African Revenue Service (SARS) rate on any loans extended to the trust.
- The possibility of difficulty in obtaining financing from banks, as they are less likely to grant a 100% bond to a trust and may require signed surety or cash security, which could lead to the sale of the property to settle outstanding debts if the estate does not have sufficient equity in the event of the death of the surety.
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