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Offshore Trusts – Trustees and a cautionary “poem”

An offshore trust can be a very effective way to manage and protect investments and family wealth. Such trusts are often established in low or zero tax jurisdiction such as Mauritius, jersey, guernsey or the isle of man. A properly established and compliant offshore trust may not be subject to income tax, donations tax, capital gains tax or death duties. The term compliance has many faces to it, but, for an offshore trust is not a choice, but rather an essential requirement. In recent years, all reputable offshore jurisdictions have entered into reporting and exchange of information arrangements with South Africa (and indeed most of the world) making offshore trusts and structures far more transparent than in previous times.

An offshore trust is established by a settlor (or donor as they are known as in South Africa) handing an initial asset, very often cash, to the trustee situated and domiciled in the chosen country, for the benefit of the nominated beneficiaries. Such professional trustees are usually registered corporate trustees (meaning a company rather than a private individual) managed by an in-country specialised fiduciary services provider. Such corporate trustees manage and control the assets of the trust and are typically required to be registered under the specific country’s financial services regulator. This provides a level of oversight and assurance to a donor that the professional trustee is accountable and subject to strict rules and regulations. They should also hold professional indemnity insurance cover and the directors of a corporate trustee should be suitably qualified and experienced. The settlor in banking, tax and reporting terminology is also known as the beneficial owner, or simply the “bo”. The identity of the bo of any offshore trust should be known to the trustee, compliance officers and the bank with whom the trust holds an account.

Offshore trusts are commonly discretionary trusts, meaning that the trustee holds the ultimate discretion as to the distribution of benefits under the trust to the nominated beneficiaries, subject of course to the provisions of the relevant trust deed and the wishes of the original settlor. Of critical importance is that the place of effective management and control (“poem”) of the offshore trust remains at all times in the offshore jurisdiction in which the trustee is domiciled. Secondly that the trustees do in fact exercise management and control of the trust. This would mean that trustee meetings, decisions, financial records, and resolutions are made, held and maintained by the trustee in the trust’s home country. A failed offshore trust may exist where a settlor situated in South Africa still blindly commands the affairs of an offshore trust to the exclusion of the appointed trustee, resulting in a shift in poem to South Africa and the trust than being taxed in South Africa.

The importance of not only following the correct procedures when establishing a new offshore trust but also the choice of a trustee cannot be understated. A face to face meeting with the directors or controlling persons of a proposed trustee in the offshore jurisdiction is well-deserving and may also provide a good island holiday at the same time!

Contributor: Neil Reikert

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