Offshore kids: the implications for estate planning
As a result, many South African families have children living overseas.
Among the families with whom we work, we see two distinct groups:
* Children who studied overseas and were able to obtain employment there long enough to gain residency or citizenship through naturalisation. Note that this is no easy feat for those who do not have residency status, as it can be a real challenge to obtain a work permit. It requires sponsorship by an employer and competition is exceedingly high. Of those who succeed and stay on, many go on to benefit from dual nationality. Few return home with new-found skills but instead remain, making a life with an established career abroad.
* Older children who left South Africa in the 1970s and 1980s. Children from this “sandwich generation” have often established deep roots in their new country and have children of their own. The elderly parents of this generation are passing on back home in South Africa.
What are the estate planning consequences?
In both the above scenarios the children have often not formally emigrated and it is important to note that until they do so, they will be regarded as “South African residents temporarily abroad” by the South African Reserve Bank (Sarb). They remain South African exchange control residents until and unless they formally emigrate by submitting a MP336(b) form to the Sarb.
Although formal emigration sounds like a severe step, there is little, if any, downside. Formal emigration does not affect their South African citizenship.
If formal emigration has not taken place, there might be estate planning consequences for the family, and regardless of the age of your child, you and they should be aware of the exchange control requirements that need to be fulfilled before a South African inheritance can be received by a South African living abroad.
The executor of a deceased estate will have to provide one of two things when transferring an account into the name of a beneficiary who is no longer resident in South Africa:
* An emigration reference number from an authorised dealer; or
* A tax clearance certificate from the South African Revenue Service.
In the case of older children, many left the country years ago with no assets and therefore no longer have a tax reference number or ID.
This can be problematic since in order to apply for a tax reference number one requires an ID.
The easier option is therefore to place your emigration on record with the Sarb and obtain an emigration reference number, which will enable you to receive assets abroad.
The good news is that no tax clearance certificate is required for obtaining an emigration approval when:
* You have been resident outside South Africa for more than five years; and
* You have no South African assets other than the inheritance being externalised.
Tax implications for your heirs
The tax implications for the heir would vary depending on the jurisdiction where they are resident. South African residents are taxed on worldwide assets, even after death, at 20% on the value of the assets up to R30million and 25% on values in excess thereof.
We are seeing some families bypassing one generation by bequeathing their assets directly to their grandchildren who having been born overseas, are foreign citizens by birth and are not considered South African tax or exchange control residents.
In some cases, parents bequeath South African assets to South African children and foreign assets to children who are abroad - equalising among the assets as needed.
Remember as an aside that South African residents temporarily abroad are not permitted to invest back into South Africa through a foreign structure, such as a trust or company. Take care not to do this, under the misperception that you and/or your children have “emigrated” simply by virtue of having lived abroad for a number of years.
It is important to take expert advice as the tax and estate planning implications are often complex.
Anthea Stephens is a senior associate at Maitland Family Office.