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Three key points about offshore investing and estate planning

The dos, the don’ts – and the ‘bottom drawer’ trust.

It has become easier to invest offshore, but investors with international assets should keep in mind that these investments may have an impact on their estate planning.

Michél Ungerer, private client family lawyer with Maitland Family Office currently in London, answers three questions in this regard.

1. Do South Africans need more than one will if they hold offshore assets such as investments, pension funds or property?

Legally, investors are not required to have more than one will, but it could make the administration of the estate easier. Depending on the type and value of the assets and the jurisdiction in which they are held, it could make sense to have more than one will.

Where South Africans only have one will dealing with their worldwide estate, the document must usually first be resealed in the Master’s Office in South Africa. This may take four to six months and will delay the division of any offshore assets.

In practice, one finds that some wills only deal with South African assets because the estate planner wasn’t aware of the testator’s offshore assets. If this is the only will, offshore assets will then devolve in terms of the rules of intestate succession, which may go against the wishes of the testator. 

It may also delay the administration process yet again, as the foreign jurisdiction may need a legal opinion and affidavit from a South African lawyer who specialises in succession planning to advise how the assets must devolve in terms of South African intestate law.

When it comes to pension funds, the same rule as in South Africa applies: make sure you have nominated your beneficiaries in terms of the rules and procedures of the pension fund, as pension death benefits do not form part of your estate and will not devolve in terms of your will or intestacy laws. 

2. Will the estate duty rate of 20% also apply to offshore assets?

South Africans pay 20% estate duty on their worldwide assets up to R30 million and then 25% on assets over R30 million (subject to certain exclusions), but the location of the assets may result in tax of more than 20% or 25%. In England for example, inheritance tax is levied at 40% on the value of assets exceeding £325 000. Similarly, in the US investors can pay up to 40% US Federal Estate tax on so-called ‘situs assets’ where the value exceeds $60 000.

Where a share portfolio is administered from the Cayman or English Channel islands, it may seem that no tax will be payable, but the tax implications are closely linked to the location of the companies in which it invested and where these companies are listed/registered. In many instances, companies are listed in the US or England, even though the share certificates are held abroad or registered in the name of a nominee.

If investors have assets in the US or England, or in other jurisdictions that levy estate duty at a higher rate, the estate duty may also have to be paid earlier. In the US, estate duty must be paid within nine months of the date of death. In England, you need to deal with inheritance tax before probate will be granted.

Investors also need to consider any double death duty agreements South Africa may have entered into with a foreign jurisdiction. Often, South Africans will receive a tax credit in South Africa where the offshore jurisdiction had the primary taxing right.

3. Estate planners usually advise parents to create a testamentary trust to safeguard the inheritance of minor children (and to avoid these assets falling into the Guardian’s Fund). What do parents need to keep in mind if their estate includes offshore assets?

South Africans often plan carefully and use their R10 million annual investment allowance to move money offshore. When they pass away, these funds may need to be repatriated to South Africa in terms of exchange control rules. In the instance where these offshore assets are bequeathed to a South African testamentary trust, the trustees may apply to the South African Reserve Bank (Sarb) to retain the assets abroad. Each application will be considered on its own merit.

Depending on the type and value of the assets held abroad, we recommend that our clients consider establishing what is referred to as a freezer or ‘bottom drawer’ trust as part of their estate planning. It is different from a testamentary trust created in terms of a will as it is an offshore inter vivos (Latin, ‘between the living’) trust – already established and awaiting the receipt of the offshore assets as an inheritance. These assets are then truly held offshore by offshore trustees, and investors would not need the approval of the Sarb or be subject to the imposed reporting requirements.

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Thank you for the article Inge. The local political landscape forces us do do our homework. The biggest cost of our government is not in the money they loot, or the destruction they cause at the SOE’s, but rather the lost opportunities, the jobs that are not created, the businesses that never get off the ground, the profits that are never made and the taxes that are never paid, the potential that is never unlocked and the bright future that passes us by.

My question – with the inter vivos “freezer” trust – will the offshore assets be liable for estate duties before it goes into the trust? In other words does this instrument prevent the liability of estate duties like a normal inter vivos trust does?

As far as I’m aware, there are two ways of getting the offshore assets into the trust. First would be a “donation” to the trust which would then attract donations tax and secondly you could “loan” the assets to the trust. This would create a loan account in your estate which is dutiable.

You leave the assets to the trust in terms of your will so it is dutiable. You cannot make a loan or donation after you are dead

Thank you for the comments.

To summarise, there are essentially 3 ways of getting assets into trust: 1) by way of bequest in terms of your will (so there would be estate duty chargeable if the asset falls into the dutiable estate of the deceased at date of death and this is where the “freezer trust” scenario would fit into), or you can already during your lifetime 2) make a donation or 3)loan to a trust.

Depending on how the assets are contributed to the trust and the type of assets, it may give rise to various tax consequences, which together with offshore trustee and administration fees could be quite onerous. In certain circumstances it may therefore make more sense not to contribute to a trust during your lifetime, but rather upon death. The “freezer” trust option essentially brings protection and estate duty savings for the next generation (who will be the beneficiaries of the trust). Each person’s circumstances are different however and a cost benefit analysis would need to be performed to identify the most beneficial way to contribute assets to a trust i.e. during your lifetime or on death.

Michél Ungerer, Maitland

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