FORMING A TRUST IN WHICH TO BUY PROPERTY
A trust is an entity that can be used to purchase and own property. The basic structure of a trust is as follows :
There are two main distinctions as to types of trusts which can be registered with the Master of the High Court. Importantly the Master of the High Court administers the registration of all Namibian Trusts under the Trust Monies Protection Act, 1934 (Act No. 34 of 1934).
The person creating the trust (trust founder) can create the trust while he is still alive or the trust can be created upon the trust founder’s death.The trust that is created whilst the trust founder is still alive is called a trust inter vivos
or a living trust. This means it is a trust between living persons. A trust that is created when the trust founder dies is called a trust mortis causa
or a testamentary trust. Such a trust is normally created in terms of the provisions of the trust founder’s will.In either event, the assets need to be placed into the trust. This can be achieved by the trust founder donating the assets to the trust or the trust has to purchase the assets.If the assets are immovable and sold to the trust, then transfer duty must be paid by the trust. There are therefore significant costs involved in getting the assets into the trust. If this is the case, then we go to all the trouble to form a trust?
The trust founder wishes to protect the assets that are in the trust. Usually, the beneficiaries would be the children of the trust founder. The structure of the trust, as indicated in the diagram above, indicates that the trustees have a relationship with the trust founder and the trust. The trust founder appoints the trustees in the trust deed or document. The trustees are often the trust founder’s attorney and / or accountant, but this is not always the case. The trust founder can also be a trustee and we also often find that the founder and his or her spouse are the trustees of the trust. It is suggested that an uneven number of trustees are appointed in order to break any deadlock in voting that may occur.
The trustees have a fiduciary duty (duty of good faith and trust) to manage the assets in accordance with the terms and provisions of the trust deed. The trust deed will indicate what the aims and objectives of the trust are. Whatever these are, the beneficiaries will benefit from the management of the assets.
Please note the following regarding the beneficiaries:
- The trust founder may also be a trustee or a beneficiary or both;
- The trust founder may not be the only trustee; however he may be the only beneficiary;
- A trustee may also be a beneficiary, even the only beneficiary. However, when a trustee is the only trustee he may not also be the only beneficiary.
The beneficiaries will usually receive an income annually from the trust and often the trust dissolves upon the happening of a certain event, for example, when the youngest beneficiary reaches 25 years of age. This is often the case with a trust mortis causa
The advantages of Using a Trust to Own Property
As soon as the assets have been transferred out of the trust founder’s name and into the trust, the trust founder is no longer the owner of those assets. In the event of the trust founder’s death, those assets will not form part of the deceased estate. The trust is therefore an excellent vehicle to use to protect the assets for the beneficiaries for future use, and provide income for the beneficiaries.
In summary, you would think about using a trust in the following circumstances:
- You wish to protect your assets for your minor children in the event of your death;
- You wish your assets to be used for charitable purposes
- It may be difficult to divide up your assets due to the number of heirs or beneficiaries that you may have
- You want to protect your assets in the event of your insolvency
We strongly advise you to obtain professional advice regarding the suitability of a trust for your needs.
The disadvantages of Using Trust to Own Property
There are certain disadvantages to using a trust. These are
- It is costly to set up a trust and to administer it on an annual basis
- The trust founder loses control over the assets and the assets must be managed in accordance with the provisions of the trust deed.
- Contractual capacities of trusts
- It is important to understand that a trust is not a separate legal entity like a company or a close corporation. Although this is the case, contracts that the trust wishes to enter into are in the name of the trustees for the time-being of the trust. Any contract will be concluded by the trustees on behalf of the trust.
- Immovable property acquired by a trust is registered in the name of the trustees for the time being of the trust. The trustees authorised by the Master of the High Court, in terms of the trust document (or trust deed), may conclude any contracts which bind the trust.
- If a trust wants to purchase immovable property and register a mortgage bond over the property, the trustees powers must include the authority to buy property in the name of the trust, borrow money for the purpose of buying property as well as the authority to encumber trust assets as security for obligation of the trust
As previously mentioned, one of the disadvantages of using a trust is the cost involved in setting up, managing and maintaining the trust. Please be aware of these costs. We strongly recommend that you check what these costs are before you set the trust up.
These costs include:
- Initial set-up costs to establish and register a trust inter vivo
- transfer duty if assets are sold to the trust
- Professional fees if you use professional trustees. These are normally charged on an annual basis by the trustees.
We strongly advise you to obtain profession an advice from an accountant or attorney before setting up your trust.
In a recent precedent which emanates from the High Court of Namibia (Main Division – Windhoek) the Honourable Justice Smuts, J as he then was, held that a transaction whereby the existing appointed trustees resign, new trustees are appointed and the beneficiaries changed, at a price which indirectly serves as the purchase price of an immovable property registered in the name of the trust, was in fraudem legis
the Transfer Duty Act.
Dr Weder, Kauta & Hoveka Inc