When liquidity is available in a SA Trust to provide funding to SA individual beneficiaries to externalise by way of, for example, their foreign investment allowances, unforeseen pitfalls can arise when the planning is not done meticulously.
To the extent that an individual is a capital and/or income beneficiary of a SA discretionary trust the trustees may transfer cash to that beneficiary by:
- making capital or income distributions to that beneficiary, or
- if the trust deed so provides, make loans to such beneficiaries. These loans can be on an interest free basis.
Where capital or income distributions are considered, the deeming provisions in the Income Tax Act in SA (“the ITA”) as well as taxation principles in terms of applying the “conduit” must be carefully considered should the funds so distributed are, or contain, current year income or capital gains.
In the case of a loan to the beneficiary, although the beneficiary will have free usage of the funds obtained as the loan, the loan will remain a liability against that beneficiary’s estate at time of death. The loan liability can reduce the SA estate duty liability in the estate of the said beneficiary as a deduction in the estate.
The trust beneficiary receiving the loan funding from the trust, should make sure that there is enough liquidity in his/her SA estate to pay the liability on death. One does not want to have to repatriate funds from offshore to be able to repay these loans on death in the deceased estate in SA. The transactions done during the lifetime of the trust beneficiary to externalise the funds will then be in effect reversed, and his/her heirs would not have the opportunity to inherit offshore funds, previously externalised.
If anyone else takes over the loan liability from the estate and pays it on behalf of the deceased, the deduction for estate duty purposes will not be available in the estate. The deduction is only available if the loan was repaid by the deceased estate. If a surviving spouse takes over the loan liability and inherits the entire estate, the estate duty liability is not needed. The loan liability is then that of the surviving spouse, with the problem moving on to his/her estate.
The beneficiary will be free to utilise the funding received from the trust, whether received as loan or distribution, for externalisation purposes in terms of the relevant annual allowances.
Kindly contact marteen@fidelisvox.co.za or suzanne@fidelisvox.co.za if you need advice on any aspect of the above, especially on possible solutions on the loan liability in the SA estate.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)