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55. Why investing offshore assets in sinking funds and endowments makes financial sense

Question: In the past, you have spoken about the benefits of investing your offshore assets in a structure. What are these structures? Are they trusts?

Answer: I am definitely not talking about a trust. I have heard a number of horror stories where participants in South African trusts have ended up paying a large amount of tax overseas as another country’s tax treatment of trusts is quite different from ours.

If you are holding offshore assets in a trust, I would recommend that you consult a trust lawyer who specialises in offshore holdings to check that you will not get any unexpected surprises. 

The structures that I am referring to are sinking funds or endowments. Now don’t think of endowments as those clumsy investment structures that the man with grey shoes sold you when you started your first job. Those were typically inflexible and offered really poor value. The new-generation products offer a high level of flexibility and transparency. They are also cleverly structured to provide you with immediate access to your funds. 

There are a few significant advantages to investing through structures like these: 

Income tax savings 

If you have a marginal income tax rate of more than 30% then you should consider using a structure, as you could pay less tax on your investments. Capital gains tax (CGT), for example, is only charged at 12% in the structure as opposed to the 18% a person on the top marginal rate would pay. 

Beneficiary of ownership 

This is where the real magic of using the structure comes in. You are allowed to attach beneficiaries of ownership to your overseas investment. This means that, should you die, the ownership of the investment would be transferred to your nominated beneficiary.   

There are a number of advantages to doing this: 

  • Your beneficiaries inherit a viable offshore investment that never needs to be brought back to South Africa. These offshore investments are typically housed in tax-friendly countries such as Bermuda and Guernsey. This is a wonderful way for your children who are living in another country to access their inheritances easily.
  • The transfer of the assets to your beneficiary is quick and seamless. This is normally finalised within weeks. If the asset had to be transferred to your heirs through the normal liquidation and distribution of your estate, this process could take years.
  • As there is a nominated beneficiary on the investment, no executor fees are payable. This should save you about R40,000 for each R1-million that you have offshore.

Death duties 

 Although the investment in the structure need never be brought back to South Africa, it will be deemed an asset in your South African estate. This means that you will have to pay 20% or 25% estate duty. However, you will not be liable for any overseas death duties, which are often much higher than the South African rate 

These offshore structures are extremely flexible and allow you to hold many types of assets within them: 

Unit trusts and shares 

If you have offshore unit trusts, you should be able to hold the same unit trusts with the structure. Similarly with shares, there are some structures that even allow you to use the same stockbroker that you have been using in the past. 

Offshore money in banks 

I often come across people who have money in overseas banks that earns very little interest. By moving this money into a structure, they get a much better return and make it so much easier and quicker for their loved ones to inherit in the future. 

What to watch out for 

When you transfer these unit trusts or shares into the structure, it will trigger a CGT event. However, I believe this is a small price to pay for the many advantages that you would enjoy. 

CGT is the one tax that you cannot get away from. It will be charged when you die. If you pay the CGT when you transfer it into the structure, the base cost starts at the higher level, so you are effectively paying the same CGT in instalments. 

Also, if your tax rate is more than 30%, the future CGT rate will be lower than what you would usually pay. 

As an individual, you are allowed to move R11-million offshore in each calendar year without much effort. If you move this money into an endowment or sinking fund structure with a beneficiary of ownership attached, you will create an offshore nest egg for future generations of your family.