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JOINT ACCOUNTS:

A 'SILVER BULLET' SOLUTION?

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Anton Maskowitz

Fiduciary and Tax Specialist

Joint accounts, also known as joint tenancy, are often viewed as a ‘silver bullet’ for South Africans with foreign assets in certain countries hoping to minimise taxes. While joint accounts can be an important estate planning tool to avoid complex offshore estate administration processes, if not structured correctly, they’re unlikely to result in any income tax or estate tax benefits for South Africans. It’s therefore crucial to obtain expert advice before setting one up.

Joint tenancy is a concept under English law that broadly results in the account holders (or tenants) holding an undivided equal share in assets under joint tenancy. Such a joint tenancy arrangement can apply only to offshore assets located in jurisdictions in which the concept of joint tenancy is recognised, for example, the US, the UK, Canada and Australia.

Civil law countries, such as those in continental Europe, don’t recognise the concept of joint tenancy. It’s also not part of South Africa’s legal system, which is founded on Roman-Dutch law principles. Although there may be a perception that persons can have a joint account in South Africa, this would typically be an account held in one individual’s name with another person, generally a spouse, having signing authority on that account.

The consequences of a joint tenancy arrangement on death are broadly that on the demise of one tenant, the remaining tenant/s will automatically hold the property equally, as the deceased tenant will no longer be part of the arrangement. On this basis, from a South African perspective, it won’t form part of an estate for administration purposes and, as such, no executors’ fees or foreign probate processes will apply.

COMPLEX SITUATION

However, from an estate tax and exchange control perspective, the situation can be much more complex. Although property held under a joint tenancy arrangement is ‘deemed’ to belong to each tenant equally, this is not necessarily the case for estate tax purposes, neither here nor in other jurisdictions such as the UK or the US.

From a South African perspective, when a person who owns the property adds another person as a joint tenant, then, on the basis that both tenants are treated as holding the property equally with equal rights of enjoyment over the property, a donation will in effect have taken place – and this will be subject to South African donations tax. However, if one spouse adds the other as a joint tenant on his or her property, this will technically constitute a gift to the other spouse, which will be exempt from donations tax in South Africa – but this may be problematic from an exchange control perspective.

South African income tax legislation, supported by case law, does provide relief from donations tax in a case where a donation is made, but where the recipient will not obtain any benefit until the demise of the donor. For efficient estate administration purposes, it is therefore possible to add a party, for example, a son or a daughter, as a joint tenant on property that belongs to the donor.

However, the agreement should stipulate that the persons added as joint tenants should not be able to benefit from the asset until the donor has died. This can be achieved by the donor retaining full and exclusive signing authority and control over the account for the duration of his or her lifetime. This will ensure that the other joint tenants won’t be able to benefit from the property during their lifetimes unless the joint tenancy arrangement is severed.

Similarly, for South African income tax purposes, given that the added tenants are restricted from receiving any benefit until the demise of the sole contributing joint tenant, any income or gains must continue to be reflected solely in the hands of the contributing joint tenant.

For South African estate duty purposes, the Estate Duty Act interacts with the donations tax exemption referred to above. It provides that where an asset was donated which was tax-free on the basis described above, the asset is deemed to be property for estate duty purposes. Therefore, where a joint tenant who added other joint tenants to the property dies, but where the donations tax exemption applied, the full value of such property must be included in the estate of that joint tenant for estate duty purposes.

US ESTATE TAX

Joint tenancy has also been held to be a ‘silver bullet’ for South African residents with foreign assets in, for example, the US and the UK, in order to avoid or minimise US estate tax or UK inheritance tax. This is unfortunately seldom the case.

In terms of US estate tax rules, unless the surviving tenant is a US citizen, all US situs assets held under joint tenancy arrangements will be subject to US estate tax in the hands of the person who added the other tenants, unless it can be proven to the satisfaction of the Internal Revenue Service (IRS) that the other joint tenants contributed assets to the joint tenancy arrangement.

There is also a common misperception that joint tenancy arrangements will provide relief from US situs taxes. While the US Code does provide for assets being deemed to be held equally in a joint tenancy arrangement between spouses, this only applies where the surviving spouse, as the remaining tenant, is a US citizen. In the case of South African investors, it’s unlikely that a surviving spouse will be a US citizen.

Consequently, unless the executor can prove to the satisfaction of the IRS that the surviving spouse also contributed his or her own funds to the joint tenancy account, the full value will be included in the estate of the deceased spouse who held the property before adding the other spouse as a joint tenant, as no spousal rollover relief will be available. This will equally apply to all other joint tenancy accounts on US situs assets, i.e., where children or third parties are added as joint tenants, and the assets will be subject to US estate tax unless the other tenant/s can prove that they contributed their own assets to the account.

UK INHERITANCE TAX

The position in the UK is fortunately not as draconian for South Africans as it is in the US. If an individual has added a spouse as a joint tenant on his or her assets, spousal rollover relief will be available if both spouses are either UK domiciled or non-UK domiciled. Therefore, if a person adds his or her spouse as a joint tenant on UK situs assets and both spouses are domiciled in South Africa, then, on the death of the first tenant, the assets will pass to the surviving tenant without any UK inheritance tax being levied.

However, in cases where a person or persons other than a spouse are added as joint tenants, UK inheritance tax will apply on the full value of the assets contributed by the person who added the joint tenant/s. Furthermore, if a non-contributing tenant withdraws any of the funds qualifying as UK situs assets and held in the joint tenancy arrangement during the lifetime of the contributing tenant, this will constitute a gift and UK gift tax could be levied.

EXCHANGE CONTROL

South African exchange control is another major stumbling block in donating offshore assets to third parties. The exchange control provisions typically require a person who has authorised assets abroad, whether in terms of his or her foreign allowances or otherwise, to provide an undertaking that such assets may not be placed at the disposal of another South African exchange control resident unless prior exchange control approval has been obtained.

Although permission will typically be given should an individual apply through his or her authorised dealer to make such a donation to a spouse offshore, the application process must nevertheless still be followed. Unless the exchange control requirements have been observed and complied with, spouses who are both South African exchange control resident may not make donations to each other offshore.

However, on the same basis as that outlined in the donation tax exemption provisions above, if a spouse is added as a joint tenant, but obtains no direct or indirect means to ‘enjoy’ the property that was the exclusive property of the sole contributor, it cannot in our view be said that the asset is ‘placed at the disposal of a third party normally resident in South Africa’.

EXPERT ADVICE IS CRUCIAL

In general, while joint accounts remain an important estate planning tool to avoid complex and costly offshore estate administration processes such as probate, if they’re not structured correctly, it is unlikely that they’ll achieve any income tax or estate tax benefits. Appropriate advice is therefore crucial when joint tenants are added to offshore assets – especially in the case of US or UK situs assets, where a spouse is not a US citizen, or where a joint tenant is a person other than a spouse.

If you’d like expert advice on any matter relating to joint accounts, please contact Anton Maskowitz on +27 (0)11 778 6657 or antonm@privatewealth.sanlam.co.za.

References:

  • Case law: Case No 11372, Cape Income Tax Special Court
  • South African income tax: S.56(1)(d) of the SA Income Tax Act, Act 58 of 1962
  • South African estate duty legislation: S.3(3)(b) of the Estate Duty Act, Act 45 of 1955
  • US tax legislation: US Internal Revenue Code S.2056(d)(1)(B) and US Internal Revenue Code S.2040(b)
  • South African exchange control: B.17(G) of the Currency and Exchanges Manual for Authorised Dealers

Expert advice is crucial in dealing with cross-border estate and tax planning.

Stanley Broun has spent 10 years in Fiduciary And Tax.

Stanley Broun

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