Should a trust hold your primary residence?

Many people are in two minds, and may receive advice for and against, whether they should place or acquire their primary residence in a trust. For Estate Duty purposes, transferring immovable property into a trust ensures that any growth in the value of the property is contained within the trust, rather than in your personal estate, to the extent that such growth rate exceeds the official rate of interest (repo rate plus one percent currently 5%). Your assets are also protected from attacks by your personal creditors and/or the creditors of any companies that you might own and have signed sureties for.

Upon your death, your properties, outside of a trust, would be caught up in your frozen estate. Your spouse, your dependents, and other persons will not have access to these assets – the properties themselves or any rental income that they might be generating – until such time as your estate is wound up. This can sometimes take many years.

If your primary residence is registered in your name, it will form part of your estate, and the beneficiaries and the executor will decide what will happen to it. This will be based upon what you have stipulated in your will. Should your will stipulate, for example, that the property be sold and the proceeds distributed amongst your heirs, it may be disruptive for your surviving spouse, should they be required to move out of the property.

In the event of there being insufficient liquidity in your estate, the executor may be forced to sell the house to generate cash to pay the Estate Duty.

Capital Gains Tax will be triggered upon your death (which is regarded as a deemed disposal), even if it remains in the family, subject to the inter-spousal rollover provisions.

If the property is held in a trust no death triggers Capital Gains Tax, and continuity of income and tenure for the beneficiaries of the trust is ensured. Remember, however, that you will lose the R 2 million primary residence exclusion for Capital Gains Tax purposes if the trustees sell it out of the trust at some point (Paragraph 45 of the Eighth Schedule to the Income Tax Act).

The decision to move your primary residence into a trust depends on your individual circumstances.

The general rule of thumb is to only consider moving any property into a trust if you plan to hold it for a long time unless you want to protect it from your creditors. However, be mindful that any loan from you to the trust as a result of the move of property to the trust remains an asset in your estate, which remains exposed to creditors.
 
A summary of the benefits of a trust owning your primary residence and other properties
Provided you do not establish a trust with the intention of prejudicing creditors, purchasing or transferring a property into a trust helps to protect the specific asset from your creditors.
There is continuity, for both the trust and the property it owns, after your death.
Assets such as farms cannot be divided. By placing these types of assets in trust, the heirs can be the beneficiaries of the income generated by the assets. The heirs are also protected from each other’s creditors, potential claims by spouses upon divorce, and potential claims of creditors upon the sequestration of an heir.
Since the property is not registered in your name, the value of your personal estate upon your death is reduced, thereby reducing your exposure to Estate Duty.
There are no Executor’s Fees on a property owned by a trust. Executor’s Fees are usually 3.5% plus VAT on the gross value (excluding any debt) of your estate at the time of your death. If the property is bonded, it could be an effective cost as high as 10% of the net value of your estate.
There is no need to transfer the property from the name of the deceased into the name of their heir(s), resulting in savings on Capital Gains Tax and transfer costs.
The punitive provisions on interest-free or soft loans in terms of Section 7C of the Income Tax Act excludes loans related to primary residences.
A number of factors, including personal circumstances, will have to be taken into consideration when a decision is to be made whether one should place a primary residence into a trust. As this may be one of your largest assets that you may acquire during your life, proper advice should be obtained before a decision is made. The following article shall deal with the factors to consider before one places a primary residence in a trust.