The recent Isle of Man roadshow held In Johannesburg gave guests and panelists a platform to discuss ways of overcoming the challenges of offshore structures. The event also looked briefly at the respective benefits and distinctions between offshore trusts and foundations.
Going back to basics, a foundation is a separate legal entity that has no owner, whereas a trust isn’t a separate legal entity. The trustee holds the trust property for the benefit of the beneficiaries. The trust concept is therefore based on a split between legal and beneficial ownership. As a rule of thumb, foundations do not depend on the split between legal and beneficial ownership, and are incorporated entities registered in their jurisdiction of establishment. Internationally, trusts based on English common law are not registered on a register (though there are currently moves internationally to establish registers of beneficial ownership of trusts as part of the fight against money laundering). This is a key difference to South African trusts which are required to be registered with the Master of the High Court and only once authority has been given by the Master, may trustees of a South African trust act. Touching on the issue of foundations, it is essential to weigh up whether the foundation in question will be treated as a company or a trust for tax purposes.
Choices
Offshore trusts are normally considered as a luxury reserved for the wealthy, however, in the form of an offshore pension trust, they can be an option for those who don't have an extremely-high net-worth with the desire to enjoy the comfort of knowing that they have sufficient retirement income that is growing in a strong currency and in a politically stable jurisdiction.
Similarly to trusts, foundations are useful as asset management and estate planning tools.
It’s critical that advisers understand and explain the differences and respective characteristics to their clients, and prospective clients in order to meet their clients’ objectives.
Increased opportunity offshore
In recent years a lot of Common Law jurisdictions such as the Isle of Man and Channel Islands have introduced foundations by statute.
Colin Bird, Partner at Maitland in Isle of Man, told the industry players that the introduction of foundations by statute is primarily to accommodate those people who are uncomfortable with the trust concept, for example persons more familiar with civil law (e.g. continental Europe).
The South African context
The key to using offshore trust and foundations effectively lies in the ability to comprehend how different jurisdictions have different rules, how they can be applied, what you can use them for, and the tax implications.
In the South African context, the fundamental differences lie in influences of the local ‘body of law’ as South African law is based on Roman-Dutch law, with an English influence.
South Africa is a melting pot that has a 'hybrid' or 'mixed' legal system, formed by the interlacing of a number of distinct legal traditions: a civil law system inherited from the Dutch, a common law system inherited from the British and a customary law system inherited from indigenous African legal traditions.
Bird explained that “South Africa took the trust concept that comes from English Common Law and tried to fit it into Roman-Dutch law and if you get into technical jurisprudence, you can get into some interesting academic debates, but essentially the South African trust is similar to an English Trust, on which the Isle of Man and most offshore trusts are also based. Although the South African Trust is derived from the English Trust, there are some significant differences.”
“Foundations on the other hand, are something similar to trusts but come out of civil law of continental Europe. They are different to trusts but you can achieve similar things. The trust is based on the principle of equity, which is a principle of English Common Law, and equity is not a part of South African law or civil law. Continental civil law doesn’t always understand the concept of equity” he further detailed.
The tax perspective
The confusion for prospective clients looking into utilizing these vehicles is often in the fact that the foundation has characteristics of a company, however it operates more like a trust.
“From a tax point of view, I don’t think there is a lot of difference in how they are treated, but that does depend on the tax authorities with whom you are dealing” said Bird.
“The founders of a foundation can possibly have more control and have more say [over the operation of the foundation], but again when you bring that into the tax context, you have to consider where it’s happening from and what the implication is for tax purposes. Beware how it’s controlled and where it’s controlled from” added Bird.
Writer’s thoughts:
It is important for advisors to break down the different characteristics and ultimately benefits of both vehicles to potential clients in order for them to start seeing trusts and private foundations as viable options for them to secure their financial future, and not necessarily as structures that are only there for the super wealthy. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts mashoto@fanews.co.za.
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