By Willem van der Merwe, Global Solutions Specialist
The South African Revenue Service (SARS) recently made a significant announcement regarding the distribution of funds from South African trusts to offshore trusts. This update has opened new avenues for estate planning, particularly for South African clients looking to optimize their wealth management strategies.
Key points of the announcement
Historically, South African trusts faced stringent regulations when attempting to distribute funds to Offshore trusts. These restrictions were primarily enforced by the Financial Surveillance Department of the South African Reserve Bank (SARB), which required prior approval for such transactions. For South African clients who are beneficiaries of a local trust wishing to externalise funds from South Africa, the only option was to use the annual foreign investment allowances afforded to South African individuals.
The local trust would need to make a distribution or loan to the beneficiaries for them to do this. However, the recent announcement by SARS marks a shift in this practice.
SARS has now clarified that it will consider approving the release of funds directly from South African trusts to offshore trusts under specific conditions. This approval will therefore not impact the annual investment allowances of the individuals who are linked to the trusts.
These conditions include:
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Qualifying beneficiary:
The offshore trust must qualify as a beneficiary of the South African trust.
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Trust deed compliance:
The distribution must align with the terms and conditions outlined in the trust deed of the South African trust.
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Tax compliance:
The South African trust, and entities linked to the trust where assets might be originating from, must be fully tax compliant and able to demonstrate that all tax liabilities related to the distribution has been or will be settled.
Estate planning opportunities
This development presents a valuable opportunity for South African clients to enhance their estate planning strategies.
Here are some key benefits:
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Asset protection:
By distributing funds to offshore trusts, clients can protect their assets from potential local economic and political instability. Offshore trusts offer a secure environment for preserving wealth.
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Flexibility in wealth management:
The ability to distribute funds to offshore trusts allows for greater flexibility in managing and allocating assets. Clients can diversify their investments and take advantage of global financial opportunities.
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Succession planning:
Offshore trusts can play a crucial role in succession planning, ensuring that assets are smoothly transferred to future generations without the complexities of local probate processes.
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Tax efficiency:
Utilising offshore trusts can provide tax advantages, as these trusts may be subject to different tax regimes. This can result insignificant tax savings and more efficient wealth transfer to beneficiaries.
Practical steps for clients:
To take advantage of this opportunity, clients should:
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Review trust deeds:
Ensure that the trust deed of the South African trust includes provisions for distributions to offshore trusts.
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Consult with tax advisors:
Work with tax professionals to understand the tax implications and ensure compliance with all regulatory requirements.
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Apply for compliance letters:
Trustees of South African trusts must apply to SARS for a manual letter of compliance, providing all necessary documentation to support the application.
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Apply to the SARB:
Once the manual letter of compliance is obtained, the bank (authorised dealer) of the South African trust will apply to the SARB for permission to make the distribution.
Key take-away
By leveraging this opportunity, South African clients can optimize their estate planning strategies, protect their assets, and ensure a smooth transfer of wealth to future generations.
