Offshore trusts have become an increasingly popular concept not only for tax and estate planning purposes but also as a vehicle to hide money that is “illegally” invested abroad.
With the announcement that you will now be able to invest R200 000, the marketing of offshore trusts is likely to increase.
Amanda Shorn of Investec associate company Integro Financial Services says over the last three decades there has been widespread and increasing use of “offshore” trusts as a way of holding personal wealth confidentially.
Many tax havens or low tax jurisdictions have enacted trust laws to protect investors. One example is Jersey, in the Channel Islands, where a substantial number of trusts are administered. The governing body of Jersey has control over trading licences and may withdraw these where the good name and reputation of the island is threatened or impaired.
Shorn says legal obligations imposed upon a trustee are onerous. Trustees may be sued by beneficiaries if in breach of trust, with the protection of beneficiaries being a primary concern.
Shorn says the advantages of trusts are many and varied. Specific types of trusts and the advantages will depend on the needs and requirements of the settlor’s (the one who puts assets into the trust), as well as the country in which the settlor is domiciled. These advantages include:
Wealth preservation and devolution of assets: A trust is an ideal mechanism to ensure that the settlor’s wealth, settled on trustees, can continue for the benefit of future generations.
The settlor, by means of the trust deed, can specify to whom income and capital should be paid, at any time.
He can give the trustees discretion to pay income and capital to beneficiaries if they consider it appropriate.
A common form of trust used in these circumstances is a discretionary trust, where the beneficiaries have no vested interests in trust assets – they are only entitled to these when trustees exercise their discretion and make awards to them.
A beneficiary, such as a spouse, may have the use of assets or property for his/her life, after which the property will pass on to other beneficiaries.
Confidentiality: An important benefit is the confidential preservation and devolution of assets. Assets not vested in a trust become part of a deceased person’s estate. This is often a costly and lengthy procedure. Wills also become public documents on death, with the result that confidentiality is not ensured.
Trust assets do not form part of the deceased’s estate. The trust “replaces” the will.
Fiscal benefits: Trusts play an important role in tax planning.
Shorn says generally, trusts are not taxed in offshore jurisdictions. The immediate advantages are avoidance or reduction of inheritance and capital gains tax liabilities.
However, she warns that the use of trusts in fiscal planning is complex, given avoidance and controlled foreign entity legislation in many countries. Careful planning is essential.
Repatriation or sequestration: Because assets of a trust are owned by trustees independently of the settlor, it is usually not possible to enforce repatriation procedures against trustees, more particularly where assets are not held in the country where the sequestration is taking place.
Trusts can protect assets from third party claims and are increasingly used for this purpose.
The term, and form of trust, known as Asset Protection Trusts, have developed. Usually, these are not designed to secure fiscal benefits, but rather to protect assets from future liabilities that may be incurred by the settlor.