Succession planning trust case study by Equiom

Situation

A Jersey trust, established some time ago, where the settlor is no longer living, provides for the benefit of successive generations of a family. The main trust asset is a large equity stake in a listed UK company, together with several smaller discretionary portfolios. The beneficiaries of the main trust are three separate trusts which were established for the benefit of three different branches of the family, all of whom live and work in South Africa.

Challenge

Given that this is a Jersey trust, it is fundamentally important that the place of effective management and control (“POEM”) of the offshore trust, always remains in Jersey. This means all trustee meetings, decisions, record keeping, and trustee resolutions must be held and maintained by the trustee in Jersey. This also rings true for whatever jurisdiction the trust is established. Failure to meet this requirement as well as following blindly the instructions of the South African settlor/beneficiaries can result in a shift of POEM and as such, rendering the trust to being taxed in South Africa.

Other challenges that trustees face have been in relation to either loans/ distributions or advancement of capital, some will require pre-authorisation by the Reserve Bank of South Africa before the transfer of funds. The trustee and beneficiary may then be faced with time consequences, should the funds be required for investment purposes meaning planning around funding is crucial and the trustees must understand the family dynamics and liquidity requirements. Challenges also arise in cases where divorcing couples are both beneficiaries of a trust. The trustee must always be impartial and ensure the demands of the divorcing beneficiaries, and those of the wider class of beneficiaries, are considered carefully. The thought process and external third party advice must be clearly documented before the advancement of capital.

Solution

The recent reform of the Republic of South Africa (RSA) exchange control rules, and the relaxation regarding the use of loop structures means that South African residents can now use funds or assets held in offshore structures to invest back into South Africa. The legislation is designed to encourage inward investment into South Africa and amendments to the Income Tax Act (ITA) have also been introduced to prevent the leakage arising from the relaxation of loop structures, so it’s imperative that suitable tax advice is obtained.