Ever wondered what will happen to your South African family trust money if you are a South African resident abroad and a beneficiary of South African trust? Well, you are not alone. Once South Africans have settled abroad, they start making plans to access their South African money. The challenge is to know which rules will apply to you.
The best way to explain what you need to know about this topic is through a typical South African scenario:
Imagine you are the matriarch of a family who established a trust to preserve your family’s wealth for future generations. The family’s wealth consisted of various farms and properties. At the time, no one had foreseen that any of the beneficiaries will leave South Africa to study overseas, to get a job, in search of a crime-free environment and eventually decide to permanently reside abroad. Yet, the world has become a global village and now you also have grandchildren living abroad, or, it is you and your family who are the ones living abroad.
The problem is that living overseas, let alone buying a property overseas, can be very expensive, especially for young professionals at the beginning of their careers, or older people with limited retirement funds. Financial assistance from the family trust in South Africa in the form of income and/or capital distributions will certainly greatly assist in either paying tuition fees, daily living expenses, or to eventually buy a property.
Trust distributions to beneficiaries outside South Africa
The trustees of the trust can decide to distribute some of the trust funds in the form of income and / or capital distributions to you or the youngster overseas. However, exchange control comes into effect when a capital and/or income beneficiary of a trust is an emigrant (a South African resident who has taken up permanent residence abroad). To establish the transferability of any income or capital distributions, a trust is classified by the South African Reserve Bank (SARB) as either an own asset trust or a third party trust, for exchange control purposes.
Own asset trusts:
An own asset trust is an inter vivos trust in which the funder is also a beneficiary, either directly or indirectly. For example, if a trust was funded by an emigrant by way of a donation of his own farms and properties to the trust. Capital distributions will be eligible for transfer abroad as part of the emigrant’s annual foreign capital allowance, but a special application will have to be made in cases when the capital distribution is in excess of the annual foreign capital allowance of R10 million. Income distributions will be freely transferable.
Third party trusts:
A third party trust is an inter vivos trust in which the funder and beneficiary, either directly or indirectly, are not the same person. This means that if the funder of the trust (e.g. father/grandfather) is not the emigrant, the trust will be classified as a third party trust. If the father/grandfather is still alive, capital distributions may not be sent abroad. Income distributions will also not be transferable if the trust was established within a period of three years prior to the emigration of the beneficiary. However, if the father/grandfather is deceased, income and capital distributions will be transferable to the emigrant abroad.
Other factors that also play a role in the determination of the exchange control policy applicable to our two trust scenarios are:
- whether the emigrant received any income distributions subsequent to his emigration, and
- the residence of the father/grandfather.
It is clear that beneficiaries who want to emigrate from South Africa and then continue to benefit from trust distributions made to them by their South African family trusts should carefully consider the exchange control policy in their situation to ensure compliance to all exchange control requirements. The circumstances of each family and trust are unique and must be clearly understood to establish whether income and / or capital distributions emanating from a trust will be eligible for transfer abroad.
To assist you in this sometimes complicated process, it is highly recommended that you obtain specialist advice. Failure to do so might lead to an undesired scenario, as the contravention of the exchange control regulations is a criminal offence in South Africa.
FinGlobal is a cross-border financial services company that provides premier financial emigration services to South Africans all over the world. FinGlobal is a licensed South African Financial Services Provider and proud partner of Bidvest Financial Services.