5 factors to consider when establishing an offshore trust

Paul-Joffre Esterhuizen, Business Consultant at Sovereign Trust

How do I approach my global estate planning and hedge my risks around our country’s unstable political and economic circumstances?

These are among the questions facing many South African taxpayers – and for a growing number, the answer lies in offshore trusts. But while offshore trusts are effective vehicles to ensure succession planning, asset protection and avoidance of the expense and delays of probate, there are five key factors to consider before establishing one, says business consultant at Sovereign Trust, Paul-Joffre Esterhuizen.

Jurisdiction

Many offshore trusts are based in -tax neutral jurisdictions – but the relevance of choosing the right jurisdiction is critical, as the benefits of the offshore trust and the effective administration of the offshore trust by the trustees will be impacted if the trust is established in a ‘black-listed’ jurisdiction.

Apart from the tax and estate planning benefits, other important factors to consider when choosing a jurisdiction include the degree of regulation and supervision of the financial services authority; the banking infrastructure; the financial and political stability of the jurisdiction; the extent of double taxation agreements; and the geographical location and ease of travel, says Esterhuizen.

Estate planning

A Trust is an arrangement in which the trustee receives in title assets and then holds and administers the assets for the benefit of the listed beneficiaries. As these assets are held outside of the settlor and beneficiaries’ estates, the settlor can arrange for the distribution of the trust assets to beneficiaries upon the settlor passing away.

An offshore trust is an effective vehicle to hold various asset classes including the shares of a company to break the controlled foreign company (CFC) rules applicable from a South African tax perspective,” says Esterhuizen.

Management

For an offshore trust to qualify for the beneficial tax treatment in a specific jurisdiction, the trust must be a tax resident of that country. This further requires that the appointed trustee must be a tax resident in the jurisdiction, and the trust must be managed and controlled from that jurisdiction.

In reputable offshore jurisdictions, trustees must be licenced and regulated by the financial services authority or equivalent local regulator. This is different to South Africa, where any qualifying individual over the age of 18 can be appointed as a trustee.

Ensure that you appoint a licenced corporate trustee, provided by a reputable trust management company, to ensure that all requirements are met. It’s also important to ensure that your trust management company has appropriate trustee liability insurance, and can provide proof of this on request,” says Esterhuizen.

Funding

The funding of an offshore trusts can take place in more than one way, of which a loan in many instances would be the most appropriate. The loan must adhere to the provisions of section 7 and section 31 of the Income Tax Act, which stipulates among other that these loans must carry interest at a market-related interest rate and be concluded at ‘arm’s length’.

Distributions

Distributions, received by South African resident beneficiaries may be taxed in the hands of the recipient. “The treatment of distributions of an income nature and of a capital nature differ, and will need to be discussed with your tax consultant,” says Esterhuizen. “However, South African tax implications only arise where distributions are made from the trust, and income can be retained in the trust and used for foreign investment.”

The bottom line is that offshore trusts offer attractive estate planning and risk reduction benefits – but you’d be advised to get expert advice to make the right choice.