Cheryl Howard, managing director at Maitland Family Office, says she is seeing wealthy clients having to unwind local family trusts in order to take money offshore. These assets then revert to the individuals concerned and become subject to estate duty.
Where offshore trusts are created, several issues arise.
The first is one of “control”. With the authority of the trustees, a donor of a local trust would have a fair degree of involvement in how the trust assets are managed and invested. In the case of an offshore trust, an offshore trust company is the sole trustee.
Then there are issues regarding loan accounts. Assets are often transferred into a trust on loan account (to avoid donations tax) either interest-free or at below-market interest rates. Section 7c of the Income Tax Act requires that donations tax be paid on a deemed interest charge: the South African official SARS interest rate if the loan account is pegged to the rand, or a foreign-country equivalent of the South African repo rate plus 1% if the loan account is pegged in the currency of that country. The dilemma for the donor, who must pay income tax on the interest received if the loan is interest bearing, is whether to peg the loan account to the rand or to peg it to the currency of the country in which the trust has been set up or the investments made. In the first instance he would pay more in tax because of the higher local interest rate but the value of the loan account would remain constant; in the second he would receive lower interest (and pay less tax on it), but the value of the loan account would be subject to exchange rate fluctuations. On death, the value of the loan account could be greater than the initial rand value as a result of a weakening rand.
There are also misconceptions about estate duty payable on a deceased estate, Howard says. With some exceptions, assets in your name, whether here or offshore, all form part of your estate, and are thus subject to South African estate duty. There may be additional death duties on offshore assets, although double taxation agreements South Africa has with certain jurisdictions may mitigate these duties. In the United Kingdom and United States, death duties are double South Africa’s rate, with the difference not being recoverable by your estate.
It is not imperative that you have a separate will for your offshore assets, Howard says. However, having one helps ease the administration and distribution of those assets on your death. “Where having an offshore will becomes non-negotiable is if you own offshore property, especially in countries with forced heirship requirements,” Howard says. Forced heirship, which applies in many European countries, is where you are required to bequeath a portion or all of your estate to “protected heirs”.
Also be cautious that you don't inadvertently invalidate an offshore will when updating your local one. “Your financial adviser needs to be aware of any offshore wills you may have, so that any changes to a local will does does make an offshore will null and void or vice versa,” Howard says.