Global inheritance taxes and probate:

don’t turn a blind eye

The requirements around inheritance taxes and probate as they affect investors residing in South Africa have been widely communicated. An investor’s deceased estate will:

• in almost all instances have a US estate tax liability of up to 40% on personal assets held in the US that qualify as US situs assets where the market value at death exceeds US$60 000, and/or
• likely also have a UK inheritance tax liability at a flat rate of 40% on such UK situs assets above the GBP325 000 threshold, and/or
• likely also require a grant of probate to be extracted in most common law foreign jurisdictions, even if no foreign estate taxes are payable in those jurisdictions.

DUTIES OF THE EXECUTOR

The function and responsibilities of the executor of a deceased estate, who in many instances is appointed locally in terms of a letter of executorship issued by the Master of the High Court, are often overlooked. Despite the fact that the Master’s jurisdiction is limited to South Africa, the executor’s responsibilities extend to the worldwide estate of the deceased.

• In South Africa, estate duty is payable by and recoverable from the executor in terms of section 12 of the Estate Duty Act 45 of 1955.
• Similarly, in the US the liability to pay any US estate taxes is vested in the executor in terms of s.2002 of the US Internal Revenue Code. Where the market value of US situs assets exceeds US$60 000, the executor must file an estate tax return (form NA-706) within nine months of the date of death. Failure to file the return will result in penalties and interest.
• The liability to pay inheritance taxes in the UK is also the responsibility of the executor in terms of sections 216 and 226 of the Inheritance Tax Act, 1984. UK inheritance tax becomes payable after six months following the month of the death of the deceased, and the executor must file a return within 12 months. Failure to file the relevant returns and to pay UK inheritance tax timeously will result in penalties and interest.

As in South Africa, paying the relevant taxes, such as inheritance taxes in the UK and estate taxes in the US, is the responsibility of the executor of the estate. Failure to do so will result in him or her being held personally liable.

UNRAVELLING THE COMPLEXITIES

What solutions can be offered to address these complexities? It is crucial to distinguish between the different asset classes an investor may hold. If there’s fixed property involved, in both common and civil law countries it’s advisable to obtain expert advice when drafting a will so as to confirm which country’s succession laws will apply. Fixed property is, as a general rule, regarded as a situs asset in the country in which it’s situated and will typically be subject to that country’s succession laws and inheritance tax regime.

Moveable property, such as investment portfolios in equities, will usually be governed by the succession laws of the country in which the deceased was domiciled or ordinarily resident at the time of death. However, the underlying assets may qualify as situs assets in multiple jurisdictions and could therefore still be subject to the relevant estate or inheritance taxes and probate of the different jurisdictions.

However, should an investor who holds such an investment portfolio be invested via a life wrapper, for example, the Glacier Global Life Plan, the assets – such as equities, funds and cash held within the wrapper – will no longer qualify as personal assets. When the plan holder or life assured dies, no death event will arise in the countries in which the underlying assets are situated. The life wrapper will be liable for estate duty in South Africa and if structured correctly, the necessity of dealing with this asset in a will and related probate matters can be eliminated completely.

Similarly, if a South African investor acquires units in a suitable foreign collective investment scheme such as a unit trust fund and the fund is domiciled outside the UK or the US, no UK or US inheritance or estate taxes will arise on the death of the unit holder – even though the underlying assets in the fund may have a high exposure to UK or US stocks. This is because the unit holder’s rights are to the units held in the fund and not in the underlying fund assets. The units must, however, typically be dealt with in accordance with the deceased’s will, and probate will likely have to be obtained in the jurisdiction where the fund is domiciled.

EXPERT ADVICE

Foreign trusts and companies can also be used effectively to prevent foreign inheritance taxes and probate from being applicable. However, recent legislative changes in the UK have resulted in many of the associated benefits, especially with regard to UK residential property, no longer being available. It’s therefore crucial to obtain expert advice before considering offshore trusts or companies as potential solutions. For assistance in this regard, contact Anton Maskowitz at antonm@privatewealth.sanlam.co.za or 011 778 6641.