Offshore assets: the flexibility of trusts over wills

While some of our clients are based only in a single location, today’s high-net-worth individuals will typically own assets in more than one jurisdiction and often have family members spread across different countries. Depending on the type of asset and its location, this can involve a great deal of legal and fiscal complexity during their lifetime – and even more so upon their death.

For internationally mobile individuals, there are many additional aspects to consider in respect of estate and succession planning and it is essential that the chosen solution is correctly structured to suit your circumstances. Failure to plan your affairs in advance of death can mean leaving your estate in disorder, to be sorted out by your successors – often at great expense and inconvenience.

Many people seek to order their affairs by making a will. This may be the most important document that you will draft during your lifetime and it is of utmost importance that you get it right. Where assets are spread over several countries, you will need to consider putting separate wills in place to deal with different assets in different jurisdictions.

But this in itself cannot not guarantee a smooth and simple estate administration process. It is essential that the separate offshore wills and the South African wills are completely aligned and do not contradict, supersede or replace one another. To avoid any overlap, the offshore wills should clearly indicates exactly which offshore assets or jurisdictions are dealt with in that specific will.

Worse, the testamentary freedom that you enjoy as a South African citizen – the right to distribute your assets freely to the people or objects that you choose and in the proportion that you choose – may not be replicated in other jurisdictions. Many civil law jurisdictions and countries of Islamic tradition have ‘forced heirship’ provisions that create a legal obligation to distribute a certain percentage of your assets to your next of kin, children, even your parents. The chances are that such forced heirship rules will be at odds with your intentions.

There are also a number of countries, such as Luxembourg and Switzerland, that do not recognise a will drafted in their country, in accordance with the laws of their country, but by a non-resident of their country. The issue of the international recognition of wills is an obstacle that often applies to individuals with an estate across several countries. The impact of language barriers and the potential for instructions to be ‘lost in translation’ is also something that will need to be considered.

It is therefore important to obtain advice in each specific jurisdiction in order to ensure that your assets are distributed in line with your wishes, taking into account the rules – and possible limitations – that apply. This will ensure that you have a clear understanding of the possible limitations involved, while also taking into account of the situation of heirs and legatees, in order to establish exactly what is legally required to ensure the smooth transition of assets to these individuals or entities.

And then, of course, there is the issue of events. Circumstances can suddenly change. Heirs may predecease you, fall out with you, move country, have children or get divorced. Or you may simply change your mind. Such events may then need to be reflected in several wills that have to be rewritten and re-formalised in several countries.

Even if your will (or wills) is carefully drafted and correctly lodged, upon death your named executors will have to apply for a grant of probate, take possession of the assets and distribute them according to the terms of the will. Such arrangements can result in lengthy delays (even a simple estate may take a year to be wound up), high administration costs (typically around 4% to 6% of the total value of the estate), and unnecessary tax liabilities.

The best alternative to a will is for the individual to set up a trust during their lifetime. A properly drafted and managed trust can confer advantages under any or all of the following heads:

• Estate planning – Many people do not want their assets to pass outright to their heirs, whether chosen by them or as prescribed by law, and prefer to make more nuanced arrangements. These might include: providing a source of income, but not capital, for a spouse for life; making provision for the education of children but not letting them have access to capital until later in life; or providing a fund to protect members of the family in the event of sudden illness or other calamities. A trust is probably the most satisfactory and flexible way of making arrangements of this kind.
• Tax planning – Assets transferred into trust are no longer considered as belonging to the settlor, so the income and capital gains generated by those assets are taxed according to the rules governing the legal owner – the trustee(s). Inheritance tax can be eliminated because the trustee(s) continue in existence after the death of the settlor. Anti-avoidance legislation in the home country of the settlor or in the location of the trust assets may seek to counteract this outcome, but a correctly structured and administered trust may offer substantial tax efficiencies.
• Confidentiality – Proving a will is a public procedure. Domestic authorities will need to receive a complete list of all the property owned by the deceased in order to assess the amount of estate duty payable before the property can be transferred to the executors for distribution. This procedure is entirely unsuitable for those who wish to keep details of their assets confidential. The only other legal form of transfer is via a trust and this would generally save estate duty and keep the trust assets confidential.
• Asset protection – Trusts can be one of the most effective ways of protecting assets. In simple terms, assets transferred to a properly constituted trust no longer form part of the settlor’s property and therefore cannot be seized if a settlor gets into financial difficulties. A court may, under certain circumstances, order the transfer into trust to be set aside and the trust assets returned to the settlor, but a trust can form an important part of a risk-mitigation strategy.
• Avoiding forced heirship – Many civil law jurisdictions and countries of Islamic tradition have ‘forced heirship’ provisions, which create a legal obligation to distribute a certain percentage of a deceased’s assets to their next of kin and/or children. If forced heirship rules are at odds with your intentions, a trust will enable a wider or different distribution of the estate.
• Protecting the weak – A trust is a useful vehicle for people who may want to provide for those – infant children, the aged, the sick or disabled – that are unable to manage their own affairs. Trusts can allow for the independent support of those who require it most.
• Preserving family assets – Preserving family assets, or growing them, is often a motive for setting up a trust. An individual may wish to ensure that wealth accumulated over a lifetime is not divided up amongst the heirs, but rather is retained as one fund to accumulate further. A trust offers a mechanism for preserving family assets while having the flexibility to allow payments to beneficiaries as the need arises. This can be further enhanced with a unified fund for investment/asset management.
• Continuing a family business – An entrepreneur who has built up a business will often be concerned to ensure that it continues after his or her death. If the shares in the company are transferred to trustees prior to death, a trust can be used to prevent the unnecessary liquidation of a family company and to ensure that the individual’s wishes are observed. These might include provision for payments to be made to members of the family from dividend income, with the trustees retaining the shares and keeping the company operational except in special circumstances justifying sale of control or liquidation. This may be particularly advantageous where family members have little business experience of their own or where they are unlikely to agree on the correct way to manage the business. This is never more applicable than in an Initial Public Offering (IPO) situation. The creation of a pre-IPO trust for major family or employee shareholdings can offer a raft of individual benefits.
• Increased flexibility – The best-laid plans can rapidly become obsolete due to unforeseen circumstances but a discretionary trust can provide a mechanism for managing property that is capable of adapting as conditions demand. No beneficiary has any fixed or absolute interest in the trust assets under a discretionary trust. Instead, the settlor can simply nominate a class of beneficiaries and give the trustees discretionary powers to distribute trust assets as and when they see fit. Beneficiaries only have a contingent interest and ordinarily would avoid any tax liability until such time as they receive a distribution.

Given that there is no one-size-fits-all solution to these complexities, personal advice specific to your circumstances is the best course of action. Sovereign’s Private Client services assist families and entrepreneurs around the world to structure their assets in a way that will help to preserve and grow their wealth and pass it on efficiently to future generations.

Sovereign Trust (South Africa) Limited has broad experience in managing trusts and estates with complex structures involving assets and beneficiaries in multiple jurisdictions and the legal, tax and compliance issues that arise when the laws of several jurisdictions may apply.