Question

I have been doing some estate planning and am looking at how I can make it easier for my children to inherit from me and not pay any unnecessary tax. I have a substantial dollar-based share portfolio that is held offshore. I have heard that this can be costly and cause delays when it comes to wrapping up an estate. Is this true?

Answer

There are two things you need to look out for when it comes to offshore investments

• Situs tax
• Probate

Situs Tax

This is the tax that is payable in the country in which your asset is housed.  Each country has its own rules and a lot of the time, these rules are often a lot more punitive than they are in South Africa.

For example, if your shares are held in the USA, you will be liable for a situs tax of 40% of the value of the asset instead of the 20% estate duty that would have been levied had the asset been held in South Africa.

Probate

A grant of probate will allow your executor to execute your will in another country. Getting a grant of probate is expensive and slows down the finalization of your estate.

To give you a feel for the type of work needed to get a grant of probate, here are some of the requirements

• The original or a certified copy of the death certificate
• A sealed and certified copy of the Will (showing the original seal) which must also be certified as a true copy by the registry that issued it
• If you have assets in other countries that will require grants of probate, you will need sealed and certified copies of any grants of probate which must be certified as a true copy by the registry that certified it.

Getting these can take a long time. I have come across estates with offshore assets that have taken a number of years to be finalised.

In addition, your executor must either present themselves personally in the country where the asset is housed or hire an attorney in that country.  These attorneys are expensive – I recently saw a probate quote where the attorney charged R8 500 an hour.   Add in court fees and stamp duty and you can see how much of your investment will disappear in costs.

Solution

A solution is to put your shares into an offshore sinking fund or endowment structure where your offshore shares will be deemed to be an asset in your South African estate

There are downsides: to this:

• You would have to pay capital gains tax when you move the shares into the structure instead of paying the tax when you pass away.
• There will also be an added layer of costs that come with running the investment through a structure.  This typically runs at between 1% and 2%. 

.

There are several advantages though:

• you will pay estate duty of 20% instead of situs tax of 40%.
• there is no need for a grant of probate
• there will there be no executor fees as you can attach a beneficiary to this investment.
• your heirs will have access to the investment within weeks rather than years– which is probably the biggest advantage.

As always, chat to a skilled financial adviser before making any decisions.