Offshore trusts are becoming increasingly popular with South Africans looking for broader investment options and ways to protect their assets from political and economic volatility. However, it’s important to know the key differences of offshore trusts to unlock their full benefits.
The major benefits of offshore trusts include tax neutrality (zero income and capital gains tax), greater flexibility (no exchange control rules to comply with), and improved succession planning (efficient and confidential distribution of wealth to beneficiaries often across borders) and investment protection.
However, it’s critical to choose your jurisdiction carefully and be aware of the potential challenges and pitfalls when it comes to structuring an offshore trust, says Coreen van der Merwe, a director at Sovereign Trust.
“Investing abroad is hugely attractive to South Africans, for various reasons: a weak Rand, an unstable political landscape and the ability to access investment options that are simply not available locally, because South African trusts are restricted by exchange control rules to invest offshore. Knowing the different structures and terms used in offshore trusts is the first step towards realising these benefits,” says Van der Merwe.
The first major challenge that many trust founders or donors (or, as they are known overseas, settlors) must overcome is the fact that they must relinquish control of their trust to independent trustees. In South Africa, it’s possible to be a donor, a beneficiary and a trustee all at the same time, and you can appoint practically anyone as a trustee. Offshore, trustees must be regulated and licensed, and are bound by a professional code of conduct.
“Giving up control of your trust to someone you don’t know can feel scary to many trust founders, but it’s actually a good thing. In fact, the only way you can save tax and properly establish a trust is to create independent control. We’re happy to give our money to banks, because we trust them, and they have licenses and professional indemnity. The same applies when you appoint your offshore trustees,” says Van der Merwe.
Another key difference to understand is the concept of a protector, which is an individual or company that has a right to veto the actions of the trustees. For example, if you’re getting divorced and want to remove your spouse as a beneficiary, the trustees can only officially remove her once the protector agrees.
It’s not compulsory to appoint a protector, but they can play a critical role in cases where minors are the beneficiaries and someone needs to ensure the correct decisions are made. They also play the role of a neutral moderator if there is a difficult relationship between siblings who are beneficiaries, for example.
Unlike the trustees, who must be independent, a protector can be a family friend, lawyer or accountant. The only proviso is that they should not be the settlor or beneficiary themselves. If the settlor is also the protector, a strong argument can be made that the settlor did not really give up control over the assets. If the beneficiary is also a protector, they can vote in favour of decisions that benefit only themselves.
Choosing the right jurisdiction is another key decision in establishing an offshore trust. Many trust founders tend to default to the popular choices like Guernsey or Isle of Man, but there are numerous other interesting jurisdictions that South Africans should consider when looking to set up offshore trusts, says Van der Merwe.
“Malta and Cyprus are generally not viewed as typical trust jurisdictions, but as EU jurisdictions they offer a range of reputational benefits for trusts. The same goes for Singapore which is emerging as a major financial powerhouse. And, of course, Mauritius is extremely popular with South Africans, because of its proximity and the fact that it’s the most cost-effective option,” she says.
Before establishing a trust, you need a deep understanding of the legal and regulatory framework governing the trust structure in the country of establishment as well as South Africa. It’s also vital to choose the right type of trust structure – discretionary trusts, savings trusts (usually structured as discretionary trusts) or pension trusts – to serve the purpose you intend.
Savings trusts usually allow for limited activity levels, but trustee fees are lower. Pension trusts are intended to create a pension pot for retirement, and the trustee fees are generally lower than discretionary trusts. Discretionary trusts are often established for the benefit of all family members without considering retirement ages of the beneficiaries. They offer more flexibility compared to the other two options, but this comes at a premium.
In conclusion, offshore trusts can provide South Africans with enhanced asset protection, tax savings and efficient estate planning opportunities. However, it is imperative to approach offshore trust structures with careful consideration and engage with competent professionals based in South Africa and offshore to navigate the complexities of international tax laws.