Investors often use trusts for their investment properties due to various tax benefits. These include the ability to allocate income to beneficiaries on lower tax rates, discounted land tax rates for certain trusts, and potential avoidance of stamp duty on property ownership changes. However, these benefits generally don't extend to main residences. Trusts don't qualify for the Capital Gains Tax (CGT) main residence exemption, meaning CGT may apply when selling a home held in a trust, whereas individuals can often avoid this tax. Therefore, when a trust sells a family home, CGT is payable on the difference between the property's cost base and the sale price. In contrast, if the property were owned by an individual, no CGT would be due.
However, whether holding a family home in a trust is advisable is not entirely dependent on tax factors alone. Business owners and professionals vulnerable to claims may choose to hold their main residence in a family trust for asset protection. By keeping the property out of their name, they shield it from personal debts in the event of creditor claims.
Alternatively, transferring ownership to a spouse offers both asset protection and access to the CGT main residence exemption. This arrangement ensures that the property isn't part of the individual's assets while still allowing CGT benefits if the property is sold. Depending on the state, transferring ownership to a spouse may also come with a full stamp duty exemption.
Succession planning is another factor when you might consider owning your primary residence in a Trust. By holding the property in a trust, control can be transferred outside of the individual's will, safeguarding it from potential challenges and ensuring it goes to the desired beneficiary upon death. This can be particularly important for individuals with concerns about their will's vulnerability to legal disputes.
Moreover, owning property in a trust can reduce the legal costs associated with dealing with a deceased estate. Since trusts bypass probate - the legal process of validating a will and distributing assets - executors may not need to seek probate if real property is held outside the individual's name. This saves time and expense, leaving more assets to be distributed to beneficiaries.
In conclusion, while trusts offer various tax benefits for investment properties, their advantages for main residences are limited. However, for those seeking asset protection, succession planning, and streamlined estate administration, holding a family home in a trust can still be a viable option. Ultimately, the decision depends on individual priorities and circumstances, and consulting with financial and legal professionals is essential to determine the most suitable strategy.
