The role of trusts in
global estate planning
The transfer of assets between generations is often a complex process, and many individuals don’t have appropriate structures in place to preserve their wealth for the next generation. To what extent are trusts – both South African and offshore – still relevant in estate planning? What is their role in ensuring you leave an accessible legacy and don’t unintentionally create a burden for those who come after you?
Many South Africans today hold assets both locally and offshore, and trusts offer an efficient and flexible way to consolidate, preserve, protect and manage those assets. Establishing a trust has a range of 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.
Trust structures can also help beneficiaries avoid the delays typically associated with deceased estate administration, as well as executors’ fees of up to 4.03% on assets. They may further protect against capital gains tax (CGT) arising from deemed disposal rules of effectively up to 18% on the capital gains on your growth assets on death. Trusts can also avoid situations where assets held in your own name are frozen on death, leaving surviving family members without access to liquidity to cover immediate expenses.
Offshore trusts play a similar role in protecting assets and enabling wealth to continue growing for future generations.
The most commonly used types of trust, both local and offshore, include the following:
Inter vivos trust: This is a trust established during the founder’s lifetime. The trust assets won’t form part of the founder’s estate for estate duty and CGT purposes, although families 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 implications.
Testamentary trust: This type of trust is created in terms of your will and comes into existence on your death. Your assets are transferred into the trust as a bequest after CGT and estate duty have been paid. Your will can specify the capital income beneficiaries, as well as how distributions should be made.
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 are also subject to strict qualifying requirements under the Income Tax Act. Interestingly, it may be possible to nominate a special trust as a beneficiary on a life annuity product, depending on the rules of the relevant investment house.
Offshore trust: Offshore trusts are often one of the most appropriate mechanisms for aligning offshore assets with an estate plan. They facilitate global diversification in a structure that allows for succession upon death, helping to avoid complex issues relating to offshore inheritance tax and probate requirements. Depending on the funding mechanism, assets held in these trusts will typically not form part of a South African estate on death for purposes of the administration process, executors’ fees, estate duty or CGT.
Dry trust: This is an offshore trust established during the founder’s lifetime, but which remains largely dormant until death. Also known as a ‘passive’ or ‘freezer’ trust, the structure becomes operational once offshore assets are transferred into it during your lifetime or in accordance with the offshore will. Whereas a South African testamentary trust only comes into existence on death, a dry trust is established beforehand but activated only once it receives the offshore assets.
Following 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 beneficiaries for as long as the assets remain owned by the trust.
Assets can be transferred to a trust either by donation or by means of a loan account. Donating funds into a trust effectively means paying estate duty ‘in advance’. While donations tax may be payable, the size of your estate on death will be reduced for estate duty purposes.
It is important to bear in mind that donations into a trust may trigger CGT events, depending on the type of assets transferred. This is broadly similar to the estate duty implications that would arise on death. One key distinction 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 circumstances, you may choose to transfer funds to a local or offshore trust by means of a loan account. However, this won’t necessarily reduce the estate duty payable on death. The tax treatment can be complex and may differ for loans to local versus offshore trusts. For example, where a loan to a local trust is not interest-bearing at the official rate, and if the rates applied to an offshore trust are not market-related, donations tax may arise on the local interest component and income tax on the offshore interest component.
It’s also important to note that where loans do carry interest at the applicable rates, the interest earned will form part of your annual income tax calculation. The decision around how assets should be transferred to a trust can therefore have significant financial consequences, making professional advice essential.
Housing most of your wealth within a trust structure is often regarded as ‘perfect planning’ from a South African perspective. However, it may not always be the ideal solution where income or capital beneficiaries have ceased South African tax residency.
Trustees should be cautious about vesting income or capital gains in the hands of non-tax resident beneficiaries without fully understanding the implications. This could create significant consequences for offshore beneficiaries, who will generally also have tax liabilities and reporting obligations in the jurisdictions in which they reside.
We generally advise clients to review their trust structures – both local and offshore – annually as part of their broader global estate planning, to determine whether the structures remain appropriate in light of changing family circumstances, including different generations living across multiple jurisdictions, or whether amendments may be required.
Trusts continue to play an important role in global estate planning. They are not suitable for everyone, however, 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 require any information or assistance relating to estate planning, please contact Stanley Broun on +27 (0)11 778 6648 or stanleyb@privatewealth.sanlam.co.za.
The formation and registration of trusts, and the provision of independent trusteeships – both local and offshore.
The creation of BEE, charitable, special and Shariah trusts compliant with regulatory and legislative requirements.
The administration of deceased estates in South Africa and abroad.
Advice on complex structures, asset restructuring and bequests in foreign jurisdictions.
Advice on emigration and immigration, foreign earnings and the application of any double taxation agreements.
Updating trust deeds to ensure they’re in line with the latest changes in the trust environment.
Updating and/or drafting of wills dealing with South African and/or foreign assets.
Advice on the establishment and management of charitable organisations, their tax status and tax deductible donations.
Advice on the potential tax consequences and reporting obligations if you hold a US passport or green card, or if you have children living in the US.
Guidance on the financial implications of life-changing events, such as getting married, divorce or the birth of a child.
