Foreign assets and estate planning: What to consider
Forced succession may come into play.
In a bid to protect themselves against geopolitical and currency risks, many South Africans have been investing a growing part of their wealth offshore.
Due to the different laws applicable, estate planning across multiple jurisdictions is a complicated exercise and it is advisable to seek specialist advice for each country. If an individual has a separate will for offshore assets, it is important that one will does not accidentally override the other.
South Africans had three broad options when investing offshore, Gordon Stuart, managing director of Accuro Fiduciary Mauritius told delegates at the 7th annual Fisa Conference.
The first was to acquire assets in their own name. This could include an offshore bank account, immovable property or listed shares.
These assets would form part of the deceased estate and there were a number of issues South Africans had to be aware of, Stuart said.
The cornerstone of every estate plan was a will, which set out the testator’s wishes for succession and continuity.
South Africans with foreign assets had to ensure that they had a will in place that dealt with these assets. It was also important to note that death duties could be applicable, he added.
“If there’s not death duties in South Africa, there is the contingent risk that there will be death duties offshore such as in the United Kingdom and in the US.”
However, there were also countries that didn’t levy estate duty, such as Australia and Namibia.
The second option was to make use of life wrappers and roll-up funds.
“Principally these investment vehicles are used to circumvent income tax that is received or accrued on an annual basis.”
Stuart said the life wrapper would fall outside the estate for probate, but probate was still required for the roll-up fund.
The investment value would be subject to estate duty tax in South Africa, he added.
The third option was to acquire the asset or investment through an offshore structure. In this instance, the principle was typically that the South African lent the funds to the offshore trust or structure and that the loan account would be an asset in his estate.
Estate duty tax and probate fees were calculated on the value of the loan account, but there was no deemed capital gains tax on the loan account, Stuart said.
In terms of South African Reserve Bank (Sarb) regulations a local trust may not directly own a foreign asset, Stuart stressed.
“If the South African will bequeaths either directly or indirectly assets to a South African trust, then technically speaking those [offshore] assets need to be repatriated.”
Although an application could be made to the Sarb, there was no guarantee that it would be approved, he added.
Stuart said while he was often aware that a client had offshore assets, the will regularly stipulated that the testator bequeathed the residue of his estate to his spouse, or that if she predeceased him, or failed to survive him for a period of 30 days, in equal portions to his children. Where the children were under the age of 25 (for example) it would be held by the trustees until the children turned 25.
Effectively, the testator therefore bequeathed his assets to a testamentary trust, but since the Sarb did not allow a local trust to directly own foreign assets, this was something to consider, he added.
South African residents are essentially free to bequeath their assets to whoever they please (subject to certain exclusions), but a number of countries – including some European jurisdictions and Mauritius – have forced succession rules.
“The consequences of forced succession are that assets will pass to individuals that the deceased might not have intended to benefit as well as triggering untimely death duties.”
Although the European Succession Regulations (Brussels IV) can offer an opportunity for individuals to choose that the law of their nationality should apply to the succession of their assets, this was not the case in Mauritius.
Mauritius was a forced heirship jurisdiction and a portion of the estate was reserved for the children of the deceased, Stuart said.
The law of succession in Mauritius is derived from the French Napoleonic Code of 1804. The Code attaches an “unchallengeable right” to a reserved portion of the deceased’s estate for the direct line of heirs. Such heirs are entitled to a reserved part of the estate of the deceased.
“Therefore no matter what you do… or what you put in the will, the children are going to get their reserved portion.”
If the deceased had one child, 50% of the estate would automatically pass to the child. If he had two children, 66% would pass to the children and where he had three or more children 75% would pass to them, Stuart said.
The testator was free to bequeath the unreserved portion of the estate to whoever he wanted to.
“That is quite an important factor to take into account for South Africans who are moving across to Mauritius or alternatively who are looking to acquire residency in Mauritius through the acquisition of property.”