Offshore Trusts: What to know

An offshore trust is a trust established in a jurisdiction outside of South Africa. These trusts are often established in low or zero tax jurisdiction, such as: Mauritius, Jersey, Guernsey or the Isle of Man.

What are the benefits of an offshore trust?

Although the tax position of the settlor and/or beneficiaries has to be considered, offshore trusts are often associated with the tax advantages they can provide. Additional benefits of an offshore trust, as with local trusts, include:

• asset protection for future generations;
• savings on estate duty;
• avoidance of probate;
• lifetime tax savings.

A benefit of an offshore trust is that the trust keeps the assets out of the reach of creditors. South African Judges do not have jurisdiction over foreign citizens, thus local Judges cannot legally compel a foreign trustee to release funds to a judgment creditor.

How is an offshore trust registered and managed?

An offshore trust is established similarly to a South African trust. A Donor/Settlor would form an offshore trust by handing the initial asset(s) to the trustee, who must be domiciled in the chosen jurisdiction, for the benefit of the nominated beneficiaries. Trustees are usually corporate trustees, similar to the corporate trustees managed by fiduciary services providers/companies in South Africa, with similar structures to regulate the entities and provide oversight and assurance to Donors. 

Offshore trusts are often discretionary trusts, providing the trustee with the ultimate discretion as to distribution of benefits subject, of course, to the trust deed as drafted in terms of the wishes of the Donor/Settlor.

The place of management, applicable administrative rules, and rules regarding registration of the trust remain that of the jurisdiction in which the trustee is domiciled. This also means that meetings, decisions, financial records and resolutions made are done and managed by the trustees in the trusts home country. It is essential that the place of effective management of the trust is outside the jurisdiction and doesn’t shift to South Africa.

By virtue of the aforementioned, the importance of not only applying correct procedures when establishing a new offshore trust, but also the choice of trustee cannot be underestimated. A meeting with the proposed trustees in the offshore jurisdiction, as well as ongoing meetings for feedback is advised.

Offshore trusts vs traditional trusts

As can be inferred from the above information, offshore trusts are very much like traditional trusts. Similarly, they comprise of a relationship between: the trustees, donors/settlors and beneficiaries. The document itself is drafted as a Trust Deed. The difference lies in their protection of trust assets from South African creditors in a foreign jurisdiction. This protection is itself not all that different from the protection provided by a local trust in terms of local creditors. The foreign jurisdiction and management aspect is simply an added buffer to local protection.

Deciding to form an offshore trust 

When deciding to form an offshore trust, it is important to realistically consider future goals. It will take resources to establish and maintain an offshore trust, as such registration of an offshore trust is not viable for smaller asset bases whose needs could be better met by alternate vehicles Therefore, it is worthwhile to commit and invest in research and advice from fiduciary and tax specialists before making a final decision. It is important to ensure that the ultimate protection and savings are in line with your long-term goals. While costs should be considered, an offshore trust can provide sound peace of mind for those looking for protection from untoward scrutiny, litigation, and civil strife in the right circumstances.