Trusts are not an unfamiliar term and their use dates back to the 12th century, when land was passed to âtrusteesâ to pass on to the owner's children, should the owners pass away during the wars. In the past decades, a trust became a popular vehicle for Ultra High Net Worth families as a means of safeguarding their global wealth. Trusts have always been regarded as flexible, tax efficient structures, providing for the protection and transfer of wealth between generations. Trusts have unfortunately received a bit of a reputation in certain jurisdictions when it comes to governance and tax reporting.
In recent years, trusts have been scrutinised - specifically from a tax perspective - presumably because of the assumption that they are used as a mechanism to avoid tax. The primary rationale for any estate planning structure should be focused on the purpose for setting up the trust e.g., estate planning, asset and wealth protection, rather than as a means to avoid any tax. Regardless of the scrutiny faced, the value of trusts is undeniable. Wealthy individuals are continuing to make use of trusts to derive the generational wealth protection benefit intended by these structures - as mentioned above. With the increase in digital capabilities and ease of doing business on a global scale, making use of a team of knowledgeable professionals is essential to ensure that all bases are covered, given the potential implications from a wealth transfer and tax perspective. This applies to both local and international trusts.
With many South Africans now deeming themselves to be global citizens, in line with global trends, we have seen an increase in the use of international trusts for estate planning purposes. It has become common to own assets in various jurisdictions and, since travelling restrictions have been eased, more people are travelling frequently to visit their families, second homes, or merely enjoying international travels in different countries across the globe. Given the fact that South Africans have been able to externalise funds from South Africa for more than two decades, many have been able to build up a significant asset base outside of the country. These international holdings provide the investor with access to funds abroad, and a hedge against both South African and other risks,
as well as providing flexibility to invest outside of our borders in various ways. Whilst individuals are considering a range of investment options, it is advisable to consult with a financial advisor who can create the awareness towards various estate planning considerations as it is an essential element concerning the potential use of an offshore trust. This would include reflecting on changed circumstances, and whether the intended structure would allow for flexibility to change with the family dynamics.
Although research shows that the primary objective has shifted largely towards a focus on the protection of assets, tax and other implications on assets held globally remain an important factor. Worldwide assets will typically form part of a client's South African taxable assets, but they can also have a tax implication in the applicable country where the asset is situated, commonly referred to as âsitus taxesâ. Situs tax refers to tax levied based on the location of the assets held, i.e., in another country, even though the owner is not a resident or domiciled in that country. An offshore trust can consequently be considered as a useful planning mechanism to mitigate these risks and play a role as a solution when protecting offshore assets to be passed on for future generations.
In South Africa, we have seen a relaxation of exchange controls over the last few years. This was amongst other factors aimed at attracting international investors and has generally been positively received in the industry. National Treasury and the SARB are replacing the current system with a more user friendly and transparent capital flow management framework. Stronger measures are implemented to fight illegitimate financial cross-border flows and tax evasion. Similarly, we are seeing global initiatives aimed at curbing tax avoidance. This resulted in different countries co-operating in the form of warranting an automatic exchange of information. This exchange of information is in respect of worldwide assets held by non-tax residents or where the non-tax residents are connected with estate planning structures in another country, thereby enhancing tax compliance across countries. Although these actions result from good intentions, it has led to an increase in compliance and other functions on the trustees as administrators of international trusts. In order to stay compliant within their regulatory framework, trustees need to ensure that they are able to support all the functions they are performing. It is therefore important to implement a viable trust structure and to ensure partnering with a professional trust service provider who can provide comfort that the necessary functions; responsibilities and relevant regulations will be complied with.
Global initiatives promoting tax transparency have exposed an increase in regulatory requirements on trustees, often resulting in increased administration charges. It is therefore imperative to evaluate the offshore trust and trustee to ensure that the trustee is providing an effective service. Ultimately, a robust and compliant structure will endure, providing future generations with the intended benefit.
