A global asset and family footprint requires careful estate planning

When it comes to estate planning, people seldom appreciate the complexities a global footprint brings – Fisa.
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South Africans are increasingly spreading their international wealth footprint. They are seeking exciting investment opportunities, they want to buffer their exposure to political risks in SA, and their families are finding new opportunities abroad.

However, when it comes to estate planning people seldom appreciate the complexities this global footprint brings with it, says Dr Eben Nel, national chair of the Fiduciary Institute of Southern Africa (Fisa).

“Estate planning starts by understanding the rules of the jurisdiction in which you are acquiring assets, before you actually acquire them. It is exciting that we can have assets all over the world and take millions out of SA to invest, but we must understand what the long term consequences are.”

Legal systems

It is always better to spread your assets from a risk point of view, but having said that the cost and consequences must be carefully weighed because every jurisdiction has a different legal system.

There are major differences between the succession laws in each country, and the manner in which assets are administered after death and the tax rules affecting the estate will differ.

Nel says understanding the differences not only creates order, but also ensures that the heirs will benefit optimally from the inheritance.

“It prevents a blessing from becoming a curse.”

South Africa has a mixed law system – with civil and common law characteristics – while other countries have either common law or civil law systems. This is the base from which a jurisdiction considers succession.

“In South Africa we have total freedom of testation. We are used to the concept that a testator can do with their assets whatever they please. In many countries around the world there is a form of control over heirship.”

Nel says in these jurisdictions there are certain formulas that must be complied with, for example, a certain percentage of the estate must go to the children. If these heirship rules are not adhered to, the testator’s wishes will be overruled. It may happen that only a portion of the will can be administered according to the testator’s wishes, and the rest will have to follow the rules of the system.

Nel explains that if a South African buys a property abroad and bequeaths it to their spouse in their South African will, they must be sure that forced heirship rules do not apply to the asset.

They must also consider the effect of their chosen matrimonial property regime and be cognisant of the fact that the particular foreign jurisdiction may not recognise an accrual dispensation.

“There may be a conflict between the matrimonial property regime in SA, the will in SA and the rules of succession in the jurisdiction where the asset is acquired,” says Nel.

Different wills

The question is whether it is necessary to have a will for every jurisdiction to ensure that the SA will addresses the SA assets and the other wills deal with assets in other jurisdictions.

“I do not think it is possible to say that as a general rule one should have a will in each of the jurisdictions where you have assets. In some instances, it will make good sense, but one will have to carefully consider how one will may impact on the other.”

Nel has experienced instances where wills unintentionally renounced other wills because of the wrong wording. If a will is drafted in a foreign jurisdiction it will often be done in the language of the country.

In the case of the United Arab Emirates, the will has to be drafted in Arabic, and it has to be registered in the country. The registration fee alone can be around R25 000.

Cost considerations

“When globalising your wealth footprint, you need proper estate planning with people who have knowledge on both sides of the ocean to advise you; you must regularly revisit your planning as your estate changes or as your family changes and moves around.”

Nel advises people not only to consider the financial return on the investment or acquisition. “You must also ask what happens with the asset when you die and how it will affect the heirs. You should also consider the costs if it is necessary to consult with a solicitor in the foreign jurisdiction.”

If an asset is locked up in the estate in a foreign jurisdiction it may mean your spouse will have to consult with estate administrators in that country. This has cost implications.

Language can be an issue, and the remaining spouse will be dealing with a totally foreign legal system. It may even lead to court applications to get access to the assets. This too, has cost implications.

Couples of different nationalities have their own unique set of considerations. They will have to decide where their domicile will be, and perhaps elect in their wills where their habitual residence is. This will be a connecting factor when considering which legal system will be applicable to their succession.

“It is important to ask the right questions, to get the right advice and not to think it is business as usual, and that a standard will is sufficient. It is likely not to be,” Nel warns.

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A killer is US rules about US assets being subject to US estate duty. Would the simplest not be lending all the money to a trust in a low cost jurisdiction? Then your SA will deals with the loan account and the trust survives.

Johan , a fully funded offshore trust is not simple or cheap. Did you look at the wrapper structure housing a securities account? Either the wrapper or the trust will likely manage the US estate duty.

I propose that the difference in the expected growth rate of the assets in either the Offshore Trust or the Life Wrapper structure determines which is the most suitable. If the CAGR is the same, then the Trust structure with the tax on the interest on the loan account plus the Trust management fees will be too expensive. I am uncertain about the local liability for estate duties for assets in the Life Wrapper. If those assets are liable for estate duties, then the Offshore Trust makes sense nonetheless.

So, an Offshore Trust is only a viable option for someone who can outperform the average investment in the Life Wrapper structure. These individuals are few and far between.

I would appreciate your opinion.

I am mainly commenting about separation of the person’s life from the entity holding the investment. If you invest through a wrapper your own estate and the investments are ended and subject to estate taxes based on nexus of the underlying directly held investments. I would think? The wrapper cannot survive your death. If we put $100 into a trust and own a loan account, that loan account is the asset in our estate, not the value of the underlying investments, which carry on.

I assume that I would be directing the investments rather than leaving it to others, so the growth or yield in the underlying would be the same. There is ZERO chance that I let wealth or fun damagers decide where the money goes. Their fees would far exceed the cost of trust administration. Most trust locations also do not tax the foreign income of the trust.

Also, being a dollar or pound loan to the trust, the interest rate would not give rise to a serious tax issue in SA. What is an arms length trust loan interest rate in pounds? With 12 month LIBOR at 1.4% an interest rate of 2% would be fair at 50% premium

Johan, remember the provisions of sec 7C of the Income Tax Act. Any loan to a trust (to which the lender is a connected person) is subject to this. If the loan attracts interest at less than the “official rate” (currently 7.25%) the difference between the rate charged (e.g. 0% in case of an interest free loan) and 7.25% is deemed to be a donation from the lender to the trust made on the last day of the tax year of the lender. So if you lend less than R1.379m to the trust, that’s OK because your annual R100k donations exemption will wipe out the donation. More than that and you will start paying 20% donations tax. And R1.379m is not a lot of money …

LouisV: as far as I get it, the rate would not be 7.25% if the loan is for example GBP denominated? It must be armslength, so with LIBOR at 1.4% a fair risk adjusted rate would be around THEIR prime rate of 2%

Johan, the definition reads as follows in sec 1 of the ITA:

“official rate of interest” means—

(a) in the case of a debt which is denominated in the currency of the Republic, a rate of interest equal to the South African repurchase rate plus 100 basis points; or

(b) in the case of a debt which is denominated in any other currency, a rate of interest that is the equivalent of the South African repurchase rate applicable in that currency plus 100 basis points:

… (the rest not relevant for purposes of this discussion)

This means that if there is an equivalent to the repo rate in the jurisdiction of the offshore trust, the official rate for purposes of sec 7C is whatever that rate happens to be, plus 1%.

This is an important topic and its good that Fisa is doing work in this area.
However if one waits until you understand the ins and outs of each possible jurisdiction before shifting a good junk of your asset base offshore you will be left clutching a wad of useless ZARS after the horse has bolted.
Not only that , the dysfunction of the master of the high court and home affairs means that the SA estate can go into a state of paralysis for an indefinite period of time. An offshore trust (freezer or fully funded) or an offshore insurance wrapper (with a beneficiary nomination) will cover many issues raised in the article.

@Sensei – the value of a life wrapper is liable for estate duty (but not executor fees). Discovery sells a pure risk wrapper that gets around SA estate duty but that is a different animal altogether.
@Johan – an offshore trust will likely be set up so that the trustee (not you) directs the investments who in turn will outsource this function to a consultant who will then again outsource this function to a money manager. If you reserve powers to direct the investment the place of effective control will likely make the offshore trust a tax resident of SA (if you are a SA tax resident) A wrapper can survive your death if there are joint contract holders. (Not possible for < 18 years old) You can direct the investments in the wrapper yourself with no adverse tax consequences.

Thanks ICE. Of the wrappers I looked at, their definition of your deciding was limited to from a selection of funds, you could not select Apple, Google, Booking for example. They also offered limited tax shelter. You still realize CGT on shifts and still pay tax on dividends, interest, property income, etc. Well, YOU don’t pay it but the insurer does which affects the value of your portfolio. In a trust situated in a good territory, its income from beyond that jurisdiction is not taxed in the jurisdiction. You would still pay for example US withholding tax on dividends.

I suppose taxes and death and the old saying…

Wrappers cost close to 1% (wrap of 0.6% plus broker 0.5%)P.A. Most wrappers dont allow dircet – must go via broker (Sanlam Momentum etc)
PLUS Estate Duty at each generation (20%), PLUS CGT at each investment decision change (albeit at 4Funds rates of 12% rather than 20%)

Trust costs are closer to 0.5% per annum

Either way assume they cost the same !!!

In Channel Islands – The Trust has no CGT, no corporate tax, no tax on interest in trust, no inheritance tax. So buy an ETF (no advise needed) at zero cost from Fidelity or Blackrock (0.12%) on S&P500 or similar.

So if the intention is for long term wealth creation/ or inter generational – best to get into the trust in the Channel Islands or similar

Interest on Loan to Trust is 1.75% – so just have to beat 1.75% (S&P 500 has done an average of 8-12% pa over most 10 year and longer time periods

Thank you for a treasure-trove of information guys. You guys should write an article on the topic. It is for this kind of information that I visit Moneyweb

End of comments.

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