THE ROLE OF TRUSTS IN
GLOBAL ESTATE PLANNING

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These days many South Africans have assets both within the country as well as offshore, and trusts offer an efficient and flexible way of ensuring your assets are consolidated, preserved, protected and managed objectively. They offer many benefits, not least of which protection against claims by creditors, and since the assets in the trust (depending on how they were transferred) won’t form part of your estate, estate duty of 20% (or even 25%) in South Africa won’t be payable on your death.

In addition, your beneficiaries won’t be faced with the delays usually associated with the deceased estate administration process, or executors’ fees of up to 4.03% on your assets. Trusts can protect against capital gains tax (CGT) arising as a result of the deemed disposal rules of effectively up to 18% on the capital gains on your growth assets on your death. They can also protect against assets being frozen on your death in your own name with no access to liquidity for your surviving family members to pay the bills.

Offshore trusts play a similar role in ensuring that assets are protected and wealth can continue to grow for the generations that come after you.

TYPES OF TRUST

The most commonly used types of trust, both local and offshore, are the following:

Inter vivos trust: This is a trust established while the founder is still alive. The trust assets won’t form part of the founder’s estate for the purposes of estate duty and CGT, although the family should seek expert advice on the mechanics of transferring assets into the trust as well as the potential income tax, donations tax and estate duty consequences.

Testamentary trust: This type of trust is created in terms of your will and comes into existence at your date of death. Your assets are then transferred into the trust as a bequest after CGT and estate duty have been paid. You can specify the capital income beneficiaries in your will, as well as how you want distributions to be done.

Special trust: Special trusts are in our view the ideal vehicle to benefit individuals unable to manage their own finances – such as disabled or mentally handicapped persons, or minors. Compared to other trusts, they enjoy a host of tax benefits, but they also have their fair share of qualifying requirements as set out in the Income Tax Act. Interestingly, it may be possible to nominate a special trust as a beneficiary on a life annuity product, but this would depend on the rules of the investment house in question.

Offshore trust: Offshore trusts are often the most suitable mechanism to align your offshore asset holdings with an estate plan. They facilitate global diversification of assets in a way that allows for succession upon death, so complex issues relating to offshore inheritance tax and probate requirements can be largely avoided. Depending on the funding mechanism, in South Africa, assets held in such trusts typically won’t be considered part of an estate on death for purposes of the administration process, executors’ fees or estate duty and CGT.

Dry trust: This is an offshore trust that is established while the founder is still alive, but the dry trust – also known as a ‘passive’ or ‘freezer’ trust – remains practically dormant until the date of death, when your offshore assets will be transferred into the trust, as determined in your offshore will. So, whereas in South Africa a testamentary trust comes into being only at the date of death, a dry trust is set up beforehand, but only becomes fully operational once it receives the offshore assets.

Subsequent to the payment of the relevant CGT, and estate and/or inheritance taxes on death, once the assets have been transferred as a bequest to the dry trust, there will likely be no further South African income or estate taxes in the hands of the beneficiaries for as long as the assets remain owned by the trust.

TRANSFERRING ASSETS

Assets can be transferred to a trust either via donation or a loan account. Donating funds into a trust essentially means you’re paying estate duty ‘in advance’. You’ll be paying donations tax, but the size of your estate on your date of death will be smaller for the purposes of estate duty.

Bear in mind that donations into a trust may trigger CGT events, depending on the type of assets you transfer, but this will be very similar for donations made during your lifetime and estate duty at the date of death. The main exception is that any income or gains arising in the trust will typically remain taxable in the hands of the donor during his or her lifetime.

Depending on your individual circumstances, you may wish to transfer funds to a local or offshore trust by means of a loan account, which will also have tax consequences, but won’t necessarily decrease the estate duty payable on your date of death. The tax consequences of transferring assets to a trust can be complex and can be different for loans made to local versus offshore trusts. If a loan to a local trust is not interest-bearing at the official rate, and if the rates for a loan to an offshore trust are not market-related, this can give rise to donations tax on the local interest component and income tax on the offshore interest component.

It’s important to note that where loans do carry interest at the above-mentioned rates, the interest earned will form part of your annual income tax calculation. Deciding which method of transferring assets to a trust to use could have far-reaching financial consequences and it’s therefore crucial to consult an adviser to discuss your particular situation.

OVERSEAS BENEFICIARIES

Housing most of your wealth in a trust structure is generally regarded as ‘perfect planning’ from a South African perspective, but it may not be the best solution if any of the income and capital beneficiaries have ceased their South African tax residency.

Trustees should caution against vesting income or capital gains in the hands of non-tax resident beneficiaries without understanding all the implications, which could have severe consequences for the offshore beneficiaries – who will typically also have a liability to taxation and obligations to declare such distributions to the tax authorities of the country they’re living in.

We normally advise our clients to review their trust structures on an annual basis as part of global estate planning, to determine whether they are still the most appropriate structures given potentially changing family circumstances, including different generations living in multiple jurisdictions, or whether amendments need to be made.

Trusts – both local and offshore – still play a key role in global estate planning. However, they’re not for everyone, and there is no one-size-fits-all solution. Your personal circumstances, and therefore your estate plan, will be unique, and it’s important to seek professional advice – especially if you have assets in multiple jurisdictions. If you need information or assistance with any aspect of estate planning, please contact Stanley Broun on +27 (0)11 778 6648 or stanleyb@privatewealth.sanlam.co.za.