Be aware of foreign estate implications of offshore investments - expert

(iStock)
(iStock)

Cape Town - Due to the relaxation of foreign exchange controls in SA, many investors are seeking to diversify risk by creating offshore estates, but often without thinking about the implications if the investor should die.

David Knott, fiduciary expert at Private Client Trust, a division of Private Client Holdings, explains that people often don’t think about what effects the death of an offshore investor will bring about.

He says in many instances, a South African will would be acceptable and recognised in that foreign jurisdiction, provided it complies with the South African formalities.

Forced heirship and the rules in other countries

“The local executor, once appointed, would then need to appoint an agent in the foreign jurisdiction to deal with the foreign estate and effect a distribution to the heirs. A single world-wide will is workable in many instances where there are no forced heirship rules in place,” explains Knott.

“There are no such rules in the common offshore havens such as Jersey, Guernsey or Isle of Man.”

He adds that due advice and caution must be taken where forced heirship rules apply, for example in Scotland or in many European countries.

In France, the freedom to dispose of assets is restricted if the deceased is survived by either descendants or ascendants. Descendants are preferred over ascendants and a spouse is not regarded as a forced heir.

If the deceased is survived by one child, that child must receive at least one half of the estate; where two children survive they must share equally two-thirds of the estate and if three or more children survive they must share equally three-quarters of the estate.

“Spain, Belgium, Portugal and most other European countries all have different rules. Several jurisdictions demand that any fixed property in that country can only devolve under descendants and, failing them, ascendants - and only if none, then upon remoter beneficiaries," says Knott.

He adds that matters become considerably more complicated if an estate is held in an Islamic country.

One “world-wide will” vs separate wills for each jurisdiction

Whether there are forced heirs or not, obtaining the necessary local documents in a manner acceptable to the foreign probate office could take up some time.

For example, translations may be required and for this reason many would rather execute a separate will in the foreign jurisdiction.
 
“One would need to identify an acceptable foreign executor to draft the offshore will to ensure that all necessary requirements are met. Care must also be taken that the local will and the foreign will do not revoke each other and it is clear which estates must be dealt with in terms of that particular will,” said Knott.

Generally, an offshore estate would be liable for estate duty in SA and may also attract some death duties abroad, depending on the amount.

SA has tax treaties with many countries to ensure that assets are not taxed twice, and the local tax authority would allow a credit here against any foreign tax paid in terms of the treaty.

“If you were born or lived in the foreign country where investments are held, the foreign tax authority might be keen to deem you still domiciled in that country and so claim death duties on your world-wide estate," said Knott.

"Should this apply, it would be prudent for you to execute a declaration of domicile confirming when you gave up your domicile of birth and acquired a domicile of choice in South Africa to avoid this argument later.

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