Your Property Portfolio And Your Heirs

tax efficiencies and asset protection

The perennial questions of how to pass on the benefits of our property portfolios to our children, and how to ensure that they are well versed in what to do with them, have not been well researched,  answered and documented. tax efficiencies and asset protectionFollowing, are a few important areas any diligent investor needs to consider:

To trust or not to trust

In the first instance, we need to ensure that our property portfolios will in fact be able to be passed to the next generation, persons, dependents, cha- ritable institutions, or any other recipient of our choice. In order to ensure that the passing of the legacy transpires, it is critical that any property portfolio is structured correctly. In most instances pertaining to residential property, the vehicle of choice will be a trust, but when dealing with commercial property, there are various other factors to consider that do not arise with residential property. In many instances the vehicle of choice will be a trust, although a company or CC (Close Corporation) wholly owned by a trust is in certain circumstances an attractive alternative. However, this is dependent on the desired short- and long-term objectives, the income, and the capital gains tax ramifications. Investors who choose to invest in property in their personal capacity do so at their peril, as will become clear in the following sections. The property might never get to the next generation as the property could be attached by a creditor for a number of reasons – sequestration, divorce, general creditors, etc.

Do not be caught by surprise

While hopefully we will never get into any of the former positions, we will inevitably die at some point. When we do, a host of surprises lurk in the guises of estate duty, capital gains taxes, executors’ fees, estate freezing, and assets that cannot be passed on to minors. Properties need to be transfer-red and all mortgages settled before they can be passed on to the recipients of our choice. The transfer and bond costs will possibly put paid to any intention of passing the property to our children. Other major stumbling blocks are that our children may not qualify for the mortgages to cover all the properties in the portfolio. Therefore, we need to examine whether our deceased estates will have the liquidity to settle estate duties, capital gains taxes and executors’ fees, which can easily amount to 30% of the net value of the portfolio. In the event that the estate is not liquid, the properties will in all likelihood be auctioned to raise the cash needed to pay the costs. The above nightmarish scenario can be avoided by holding the properties in the correct structures.

Educate your children

Assuming we have had the wherewithal to correctly structure our portfolios, how do we ensure that our children catch the property bug and understand that property should always be a part of their investment strategy, as it is for any astute investor? The obvious answer is to impart our knowledge and educate them in property acquisition, administration and management, through exposure to our portfolios, seminars, books and any other relevant material. If we are encouraging, this might result in our children becoming property investors of their own volition prior to our passing away. Having achieved this, we would have accomplished our primary objective.

Protect yourself

How we educate our children and involve them in our portfolios is a tricky issue. Assuming we have structured our property portfolios in a trust, or in a company owned by a trust, how do we ensure that they get educated and become involved but do not become meddlesome, exercise unintended control, or invoke unforeseen tax con- sequences? The answers to these questions are many and varied, and we would need many pages to cover all the potential scenarios. One simple answer lies in a correctly structured trust, which should be a well-drafted protective discretionary trust. This will ensure that the children, while being beneficiaries of the trust and being involved in the portfolio, will not necessarily have any direct influence on the trust or the portfolio.

Plan ahead

At some stage in our lives, we will want to pass our portfolios on to the next generation. In order that a range of unintended consequences do not arise, proper planning should be undertaken when we start assembling our property portfolios.

The following possibilities are available:

  1. We can engage our children in our portfolios by employing them to acquire, administer or manage the properties. This is the simplest step and one which will not raise any control, tax or other unintended consequences, and it will give them valuable exposure to the business of property investment.
  2. A more drastic step could be appointing our children to the board of trustees of the trust that holds the properties, or to the board of directors of the company that owns the properties; or they could be appointed to the trust that owns the company which owns the property.

While the above actions will involve an initial transition and involve the children in the portfolio, they can be fraught with unintended consequences, such as children being requested to sign sureties, sibling rivalry, or children could possibly outmanoeuvre parents through acting as a majority. After our passing, our children could possibly collude with each other and oust or ostracise a sibling or other beneficiaries, and through lack of education or foresight, they could lose or jeopardise the portfolio.

In order to avoid the scenarios mentioned above, the following actions can be taken:

  1. At the outset of assembling a portfolio, one can set up different trusts for each child. At a point in the future, the nominated children can be appointed to the boards and their actions will not affect their siblings or their portfolios, either before or after your death. This is the simplest and least ambiguous structure to consider.
  2. Where multiple trusts seem cumbersome, a properly drafted trust will allow for the establishment of sub-trusts within the existing trust, for the benefit of nominated beneficiaries. Extreme care and caution should be taken not to invoke any tax events or unintended claims to assets through the vesting of any rights in a beneficiary.
  3. Another option available to a planner, depending on how the trust deed is drafted and how the powers are afforded to the trustees, is to create a daughter trust from the original trust, for the benefit of a nominated beneficiary. Passing on a property or a number of properties in this fashion is a very complex and tax-inefficient mechanism as it will result in CGT and transfer duty, albeit that the nominated beneficiary will end up enjoying exclusive benefits.

To summarise

Every investor should have a long-term succession plan, and hopefully, it is the desire of all investors that their children should reap the rewards of their efforts. It is not a question of if, but when you should arrange you property affairs to ensure that you and your children achieve the maximum benefits, tax efficiencies, asset protection, and estate planning from your property portfolio for the continuation of the portfolio for future generations Source:

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