Advice differs between jurisdictions

There are issues facing trustees and advisers in dealing with beneficiaries and clients across the globe.

FAnews spoke to Hilary Dudley, Managing Director, Citadel Fiduciary, about these challenges and what advisers need to know.

Layer of complexity

“Individuals are far more mobile and there is an expectation for a service provider to be able to provide multi-jurisdictional advice and solutions. This is challenging in the context of legal and tax advice that differs between jurisdictions and, in the case of tax advice, is often frequently changing and developing,” she said. 

“It is important for advisers to encourage their clients to seek qualified advice in the relevant jurisdiction, to ensure that the most appropriate and effective solutions are implemented for the family. A single adviser may not be able to give multi-jurisdictional advice but may be able to project-manage advice for a client using their network of qualified specialist advisers,” she added. 

“Another trend is the ever-increasing global compliance requirements relating to the common reporting standards/global tax transparency, source of wealth and source of funds verification, protection of personal information and so on. Such measures are understandable and necessary, but they do create an additional layer of complexity and the increasing costs created by compliance requirements are, in general, putting the more complex end of the spectrum of global estate planning tools beyond the reach of all but the high-net-worth family,” emphasised Dudley. Her observation is that this greater complexity can also come at a psychological cost, as well as a monetary cost. If the complexity of the structure keeps the planner and, perhaps more importantly, her heirs awake at night, then it is perhaps not worth it from a cost/benefit perspective. In other words, not only the monetary benefits and costs should be considered in deciding whether to use planning structures. 

Transfer of inheritances and benefits

“Exchange controls were introduced in 1985. When I started in the fiduciary industry, the offshore investment allowance was R200 000 per person in their lifetime, and this is now R10 million, possibly more in certain circumstances, per person per year. The trend in South Africa is definitely towards the relaxation of exchange controls and an increasing focus on tax residence and tax compliance,” she said. 

“In the past, exchange control was a big issue which inhibited the free transfer of inheritances and trust benefits and had a significant impact on planning, but this is steadily becoming less relevant. The relaxation of restrictions on loop structures and changes to the exchange control emigration rules effective from 1 March 2021, as set out in Exchange Control Circular No. 6/2021, mean that natural persons, whether resident in South Africa or residing abroad, enjoy the same single discretionary allowance of ZAR1 million without the need for a tax clearance status (TCS) PIN from SARS. Authorised Dealers may also allow all individuals to transfer funds of up to ZAR10 million subject to submission of a TCS PIN. However, any funds in excess of ZAR10 million will now be subject to a more stringent verification process and subsequent approval by the Financial Surveillance Department (FinSurv). South African exchange control residents no longer need to formally apply through FinSurv for approval upon emigration, which effectively means the end of the ‘formal emigration’ process for exchange control. However, emigrants cannot freely remit funds offshore and still require a verification process that could include a risk assessment. The emphasis is increasingly on tax compliance, which is evidenced by the global trend for tax transparency and information-sharing as encapsulated in the Common Reporting Standards. With the impact of COVID-19, revenue authorities the world over will be increasingly eager to collect their share of the tax pie,” she continued. Situs tax considerations and double tax treaties are increasingly relevant. 

The way trust distributions are taxed

“Despite suggestions by the Davis Tax Committee that things may evolve, there have not been changes to the way trusts or trust distributions are taxed locally. Trusts are taxed at the highest rates in South Africa, but the conduit principle is still in place. It is, thus, still possible to achieve the objects of a trust for the benefit of the beneficiaries in a tax-efficient manner by distributing taxable income and gains to beneficiaries,” she said. 

“A similar principle applies to distributions from offshore trusts received by SA tax residents. There are jurisdictions which are more suspicious of trusts outside their borders and have what amount to punitive tax rules relating to distributions received by their tax residents from non-resident trusts. This makes estate planning for a mobile family more challenging,” she added.

Mega trends of the future

In terms of trends, “more people are considering climate change, sustainability and environmental issues in general, and this will influence investing. Tech breakthroughs, such as autonomous vehicles and automation in general, cryptocurrency and financial technologies and space exploration, are gaining traction,” said Dudley. 

“There is also a growing focus on social change and addressing wealth inequality, healthcare, urbanisation and education,” she said. Particularly younger people are more aware of conscious investing and consumption. 

Estate planning and wealth management

“COVID-19 has made people think differently about quality of life and their lifestyle, their priorities and goals, and how their wealth can facilitate achieving this – or not. I think that in general, it has brought to the fore and created greater consciousness of issues such as income and wealth inequality, the lack of access to basic resources, healthcare and education, both locally and in a global context, in a way that people cannot ignore. The latest flash point in this regard is global vaccine inequality, which has been labelled “vaccine apartheid”. The continued fallout from lockdown and the economic slowdown in South Africa will mean that these issues are not short-term,” she said. 

“We advise that advisers, when speaking to their clients, encourage them not to shy away from the “D word” and rather talk openly about death, planning for death and the impact that someone’s death will have – and will not have – on the family. Having been prepared and advised of the process that will unfold assists families to feel more secure and enables them to adapt better to the new way of life after the planner’s death,” continued Dudley. 

“Generally, it is better to be more transparent and inclusive whilst the planner is alive and, where appropriate, ensure that planners educate their families regarding their estate planning and wealth management structures. Problems often arise where there has been limited consultation and information-sharing during the planner’s lifetime and beneficiaries are left grappling with the transition to a new way of life after a bereavement, at the same time as dealing with the anxiety of trying to get to grips with sometimes complex investment and estate planning structures,” she concluded. 

Writer’s Thoughts:
As mentioned above, there are issues facing trustees and advisers in dealing with beneficiaries and clients across the globe, but problems often arise where there has been limited consultation and information-sharing around complex investment and estate planning structures. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts – myra@fanews.co.za