THE ROLE AND IMPORTANCE OF TRUSTS IN PROPERTY INVESTMENT
For property investors, trusts open a world of possibilities. They offer a strategic advantage, safeguarding assets, enabling seamless estate planning, unlocking substantial financing capabilities, and providing remarkable tax benefits.
Trusts have become indispensable tools for savvy investors looking to grow their property portfolios and secure their financial future. But before we dive into what makes trusts exceptional investment structures, let’s consider what a trust is and its origins.
THE HISTORY OF TRUSTS
Dating back to the Crusades in the 12th and 13th centuries, personal trust law in England laid the foundation for what we now know as the powerful vehicle of trust structures. Back then, land ownership in England was based on the feudal system. It worked like this: When a landowner left to fight in the Crusades, he transferred ownership of his lands to someone he trusted to manage the estate and pay feudal dues in his absence. The understanding was that the ownership would be transferred back when he returned.
Unfortunately for the Crusaders, these people often refused to give ownership back upon their return. This was because English common law did not recognise the owner’s claim back then. According to the king’s courts, the land belonged to the person the Crusader transferred ownership to, and they didn’t have to return it because the Crusader had no legal claim. Crazy, huh?
But the Crusaders didn’t just give up! They petitioned the king, who then referred the matters to his Lord Chancellor’s court (the Court of Chancery) as he was allowed to make a decision based on his conscience. Most times, the Lord Chancellor would decide it was unacceptable for the legal owner to go back on his word and deny the “true” owner’s claims, so he would find in favour of the returning Crusader.
Over time, it became clear that the Court of Chancery favoured the Crusader’s claim and that the legal owner would only temporarily hold the land for the original owner’s benefit. The Crusader was the beneficiary who gave “use of land” to the trustee, and eventually, this practice developed into what we now know as a trust.
UNDERSTANDING TRUSTS IN TODAY’S LANDSCAPE
According to the Trust Property Control Act of 1987, a trust is a legal entity into which property is transferred, managed by trustees on behalf of beneficiaries, following the trust instrument, also known as the trust deed.
There are four main parties to a trust: the founder, trustees, independent trustee, and beneficiaries.
The founder is the visionary who sets up the trust and has to make an initial donation (usually R100) to get it started. It is also possible for a trust to have more than one founder.
Trustees take on the critical role of managing the trust’s assets for the beneficiaries’ benefit. They act as custodians, act on behalf of the trust, and must use the assets for the beneficiaries’ benefit only. Trustees don’t necessarily have an interest in the assets (unless they are also a beneficiary).
The Master of the High Court requires an independent trustee to be appointed for a trust. An independent trustee is a person who is not related to the trust’s founder, trustees or beneficiaries, and it is vital for them always to be aware of the responsibility they accept with the appointment of trusteeship.
As for beneficiaries, they are the fortunate individuals for whom trusts are created, enjoying the fruits of well-planned investments.
UNDERSTANDING TRUST CLASSIFICATIONS
Understanding the types of trusts and their classification is pivotal in tailoring your investment strategy. Trusts are either classified by the formation method (inter vivos or testamentary trusts) or by the rights conferred to beneficiaries (discretionary or vesting trusts).
Inter vivos trusts, crafted during the founder’s lifetime, offer unique advantages for proactive property investors, while testamentary trusts are created in a will, taking effect when the testator passes away.
Discretionary trusts grant trustees the power to judiciously allocate the trust’s income and capital to beneficiaries, enhancing flexibility and strategic planning. On the other hand, vesting trusts bestow beneficiaries with direct rights to income, capital gains, or assets as defined in the trust instrument, embracing more certainty in the investment structure.
Having the correct structure in place is the foundation of entering the property investment space. Therefore, before you start investing in property, you need to have an inter vivos discretionary trust(s) in place.
THE BENEFITS OF USING TRUSTS IN PROPERTY INVESTMENT
Investing in property using trusts offers the following benefits:
1. Asset Protection
Shield your hard-earned assets from potential risks and liabilities, as trusts provide a robust layer of protection against unforeseen circumstances.
Read our article, Understanding The Purpose Of The Family Trust.
2. Estate Planning Benefits
Escape the clutches of estate duties, capital gains tax, executor’s fees, and transfer fees, allowing seamless continuity of ownership across generations.
3. Financing Power
Leverage the strength of trusts to unlock substantial financing capabilities to buy multiple properties and supercharge your property portfolio growth.
4. Great Tax Benefits
Enjoy unparalleled tax benefits as trusts can significantly reduce your tax burden, optimising your returns.
Read our article, Unlock Tax Advantages In Your Property Portfolio With The Correct Structuring.
In his books, Robert Kiyosaki often says that the rich control everything, but they own nothing. This is exactly what a trust enables you to do. It’s a vehicle used to control assets, but you do not own it.
A trust structure (e.g., a holdings trust holding the shares in a property company that buys the properties) enables you to effectively invest in property and other assets and build a significantly larger property investment portfolio than what you would be able to in your name. Simultaneously, it protects your assets significantly better, helps reduce the tax burden, and enables you to build and leave a lasting legacy.
Read our article, Why You Need At Least Two Trusts and How to Use Them Correctly.
All we can say is, trust us, you need trusts!
Contact us today to learn more about trusts and why they are an awesome structure for your investments.
Read the entire article in the September/October Edition of Real Estate Investor Magazine.