I have an account with Saxo through which I’ve traded shares in New York over the last few months. However, I recently heard about problems with foreign investments in the event of one’s death for your estate, e.g. the need for a separate foreign will and executor, 40% estate duty, investing through insurance wrapper structures, etc. What is your view on this is? How do I navigate these problems?
Dear reader, your question is quite a complex one. I am not sure to which Saxo bank you are referring, so I am assuming you opened an offshore account with the local South African branch known as Saxo Capital Markets South Africa. I am going to answer your question in a broader sense though, and will touch on the Saxo account as well.
Local vs foreign will
Whether to have a foreign will or not depends on your individual circumstances and it is a personal decision for many clients. In the event that you only have an offshore investment portfolio and no other immovable assets, like property, a local would be sufficient for the winding up of your estate. It is also easier for the family to deal with only the local executor, instead of an unknown one, in a foreign country. When there are immovable assets one would need to look at drawing up a global will as well.
The arguments in favour of having separate wills for different jurisdictions, include using experts in the jurisdiction where property is situated. This is to apply their expertise to ensure that the will is drawn up according to the laws of that jurisdiction and allowing the administration processes in the different jurisdictions to run independently of one another.
When dealing only with investments in common law jurisdictions, such as Guernsey, it is possible to execute a single worldwide will in South Africa, and for a Guernsey executor to act on resealed letters of executorship, issued by our Master of the High Court, which works quite well in practice. The SA executor would then instruct an agent in the other jurisdiction to attend to the administration of the assets, in the jurisdiction where they are situated.
With regards to your Saxo account and New York share portfolio, in the event that you opened a foreign trading account with the local branch, Saxo will work with your local will and executor. Offshore assets are held in Saxo’s name in omnibus with Citibank and not the individual client’s name – they are held off register in the client’s name (the register being the client account with Saxo).
In the event that you opened a joint account, for example you and your spouse are account holders, the account ownership would pass 100% to the surviving owner, on receipt of the death certificate. With a single owner, your local will needs to stipulate that it covers your worldwide estate/assets.
Should you have a direct foreign account with Saxo Bank, you are unfortunately open to international estate tax implications, and I will discuss these further.
International estate taxes
Both the US and the UK have situs (position or site) taxes. The authorities in the jurisdiction where the asset is located have the legal authority to tax the assets, in this case, in terms of inheritance taxes (UK) and estate taxes (US). I’ll use the term ‘estate taxes’ when referring to either.
Even though the owner of these assets is a non-resident, these taxes will apply to all share portfolios and property owned in these countries. Note that unit trust investments are excluded. Estate taxes can be as high as 40% of the market value, of those assets.
In the US, these taxes will be levied on estates of non-residents, where the combined value of the assets in the country exceeds $60 000 on a sliding scale. In the UK the estate taxes will be levied on estates with assets of a combined value more than £325 000.
In SA, estate duty is levied on your worldwide assets. The amount payable will be calculated after application of the Section 4A abatement of R3.5 million, as well as any other deductions or exemptions, such as Section 4(q), afforded to surviving spouses. The net total after deductions is taxed at the current rate of 20%. The second dying spouse’s estate will benefit from a spousal rollover of the Section 4A abatement, bringing the total abatement in their estate to R7 million. The UK has a similar ruling, subject to certain requirements and limitations, but the US does not, and will not, grant any exemption – except if your surviving spouse is a US citizen.
Both the US and the UK have entered into a double taxation agreements preventing the situation where the same asset will be taxed twice, but in such circumstances the estate tax payable will be charged in the country with the highest rate – that would be the country where the asset is based. In your SA estate, you will be granted a tax credit against the estate tax paid, but it is capped at 20% of the amount paid.
When investing in direct share portfolios one should look at doing it through a ‘wrapper’-type product – such as an endowment or unit trust structure. Usually there is a five-year restriction period, where you are limited on withdrawal options. Keep in mind that direct offshore investments are high-risk investments and one should have a long-term investment horizon – so that the restriction period does not pose such a huge drawback. In these endowments, higher-income clients, who fall into the higher tax- bracket, will enjoy a lower capital gains tax rate, and no situs tax will be applicable upon the death of the contract owner.
Note, should you have a standalone share portfolio in place, and wish to transfer such portfolio into a unit trust or endowment product, the transfer might have capital gains tax implications.
Please speak to a qualified financial advisor for a full analysis and estate planning.