To trust or not to trust?

Trusts are often used in estate planning for various reasons, many of which are related to tax efficiencies. But are they still a suitable wealth preservation vehicle, and what are the implications of investing through a trust offshore? Should you keep your SA trust if you emigrate? What does it mean to change tax residencies?

Two of Investec Wealth & Investment’s advisors from the Tax & Fiduciary team, Johanci Meintjies and Jill Anthony, answer these questions and more in the fifth episode of the second season of our Wealth Creation podcast.

Is there still a place for offshore trusts?

"Yes, there is still a place for offshore trusts in efficient estate planning. There aren’t very many other vehicles that can offer the effective ‘rand hedge’ that an offshore trust can. However, the administration of these structures can be complex and costly, and the costs and benefits need to be weighed up to assess whether a trust is suitable for you and your needs,” says Meintjies.

What are the rules around taking your money offshore?

“You’re allowed to take R1 million out of the country without tax clearance from the South African Revenue Service (SARS). This is called your ‘single discretionary allowance’ and it essentially covers expenses such as paying for your Netflix subscription, the money you use on your trip to Greece, or when you do your online shopping offshore,” says Anthony.

“You can take a further R10 million offshore for foreign investments. In the past you could only do this subject to obtaining a tax clearance certificate from SARS. If you wanted to move more than R10 million or wanted to emigrate from South Africa, you had to follow different processes. SARS has now made the process uniform and you no longer need a tax clearance certificate; instead, you need an ‘Approval of International Transfers’ (AIT).”

“There has been a lot of fearmongering on this topic with people nervous that stricter regulations will hamper their ability to externalise their funds. This has not been the case among our clients – as long as you are tax compliant you shouldn’t face any problems in externalising your funds, although you may well face increased scrutiny and be asked more targeted questions about your bank accounts or foreign investment structure.”

“South African authorities have imposed some new rules and regulations regarding trusts to improve transparency and tax compliance, and clarify beneficial ownership,” explains Meintjies.

“For example, if you are a business entity there are Anti-Money Laundering reporting requirements that must be adhered to. These are not applicable to individuals in a family context if they do not generate business income or income from these trustee services.”

“The beneficial ownership reporting though is something that everybody needs to comply with. This essentially involves disclosing who is behind the trust to SARS on an annual basis. The authorities want to know who the trustees, founder, settler and beneficiaries are, and what trust distributions have taken place during the year, so that they can cross-reference this information with the information they have on file for your trust.”

“SA’s grey-listing has been a driving force behind SARS’s push for more information, transparency and tax compliance.”

What are some considerations for residency by investment?

“The majority of our clients love South Africa. However, a lot of them just want a plan B while they remain living here, and this triggers their exploration of residency programmes offshore. If you are interested in this route, we strongly recommend that you get formal estate and tax advice as there are a few unintended consequences of residency programmes that need to be considered,” says Anthony.

“One unintended consequence is forced heirship. South Africans generally have freedom of testation which means we can decide who to leave our assets to when we die. In other jurisdictions such as Portugal, there is concept of forced heirship which essentially means that you do not have testamentary freedom over some of your assets and you are obliged to leave them to certain people in certain proportions.”

What are some of the things I should think about if I choose to emigrate from SA?

“If you are considering emigrating, it is important to get advice in South Africa prior to starting your emigration process because certain estate planning that makes sense for South African taxpayers is lost once you become a non-resident,” says Anthony.

“If are you are a non-resident in South Africa you need to ask yourself, ‘Will my South African trust still make sense for me? Which retirement products can I externalise fully and which need to stay in South Africa? Which retirement products do I have to wait three years of being a non-resident to externalise? Are there any tax breaks available in the country that I’m moving to?”

What happens when I change tax residencies?

“Having residency in a different country does not automatically equate to tax residency. Just because you have a residency in Portugal or Spain for example, if your ordinary mode of life is still here – i.e. your pipe and slippers are still here, your fishing rod and your golf clubs are still here - you are still tax resident here. You are not tax resident there until your base moves to that other country,” says Anthony.

“It’s different in places like the US, where as soon as you have a green card, you are a US tax resident.   Now, this complicates your tax filing because now you are a tax resident in more than one country. So, do your research, get advice and use suitably qualified service providers when you decide to engage in a residency programme offshore.”

“Another important aspect to consider is that when you change tax residencies a deemed disposal is triggered on your world-wide assets, subject to certain exemptions. So, essentially your disposal of assets counts as a capital gains tax event and capital gains tax is levied at a maximum of 18% for individuals. Only once that liability is paid and you have gone through the entire process on eFiling, then you will be free to externalise your assets.”

“At the end of the day, the most important thing is to ensure that you are always compliant from a tax perspective because then you should be able to externalise your funds in a straightforward way.”