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Why You Need to Have a Separate Family Trust

Why You Need to Have a Separate Family Trust By Jaco Grobbelaar THE IMPORTANCE OF A FAMILY TRUST IN YOUR PROPERTY INVESTMENT STRUCTURE There is a proverb that says, “The art is not in making money, but in keeping it.” While one can argue that making money is an art form in its own right, preserving your wealth is a beautiful thing when done right. In our previous article, Why You Need At Least Two Trusts and How to Use Them Correctly, we discussed the different types of trusts and which structures are required in different scenarios. One of these was the Family Trust. You need a Family Trust where you can preserve wealth. This is a low- or no-risk trust primarily used to protect your assets. You also need separate Holdings Trusts that hold the shares in the company or companies or Property Trust(s) that own your investment properties. In this article, we focused specifically on the importance of the Family Trust. There are THREE main reasons why the Family Trust is so important to your property investment structure. REASON 1: ASSET PROTECTION Property entities often have a lot of debt, making them riskier. Any assets held in your name are also exposed since you would usually sign surety as a director of a Property Company or a trustee of a Property Trust. That’s why you want to keep all paid-off assets separate from the Holdings Trust and Company structure or Property Trust structure and separate from yourself. The type of assets (once paid off) you should keep in the Family Trust include a primary residence, holiday home, vehicles, paper assets and investments, life policies, furniture, appliances, electronic goods, art, jewellery, etc. You can sell existing paid-off assets to the Family Trust through a contract of sale between you and the Family Trust. Keep in mind that a list of all your existing paid-off assets with values is required to do this. Attached is an example spreadsheet. New assets in the category mentioned above should be purchased by the Family Trust and not in your personal name. Note: Your investment properties are not moved to the Family Trust but to a separate structure. You can read more about this in our article, To Restructure or Not to Restructure your Property Portfolio. REASON 2: TAX BENEFITS There are also major tax benefits of the Family Trust. It also allows you to manage the loan accounts to other entities, such as the Holdings Trust and Company structure or Property Trust structure. The flow of funds is imperative when it comes to administering structures correctly. This is how it works: You donate or lend funds to the Family Trust. The Family Trust then lends to the Holdings Trust and Company structure or Property Trust structure. This is so these entities can repay the Family Trust in the future since the property portfolio should be managed as a business, and any funds put into it should be repaid. An added benefit is that you and your spouse are allowed to each donate R100,000 tax-free to the Family Trust annually. Unfortunately, if you do not use this exemption within the financial year, you lose the benefit for that year. Remember, all funds required in the Holdings Trust and Company structure or Property Trust structure should be transferred to the Family Trust and then transferred from the Family Trust to the Holdings Trust and Company structure or Property Trust structure. The loan accounts will thus exist between the Family Trust and the Holdings Trust and Company structure or Property Trust structure and not between yourself and the Holdings Trust and Company structure or Property Trust structure. The only time that money will flow directly between you and a property entity is when you pay rent to a property entity for a property you reside in that is owned by the property entity. Note: It is important that you FIRST finalise the annual financial statements of the trust(s) before you submit your PERSONAL TAX RETURNS. REASON 3: ESTATE PLANNING The costs can be enormous when assets are in your name when you pass away. Some of these costs include estate duties, executor fees, capital gains tax, and transfer fees. This can easily wipe out a quarter to a third of the value of a deceased estate. Thankfully, every asset in a Family Trust on the day you pass away is not subject to any of these costs. A very worthwhile reason to preserve your wealth in a Family Trust! When it comes to financially protecting you and your family, a Family Trust is one of the best tools you’ve got. In fact, it’s crucial to your property investment structure. Do you have yours set up? If not, Prosperity Enterprises can help you preserve your wealth to benefit you and your family.