Trust distributions to beneficiaries living offshore can be particularly complex, but it is in your interest to know what the legal requirements are when the beneficiary of an inter vivos trust is permanently living abroad.
Trusts in South Africa: resident or not?
To be able to apply the correct set of requirements for exchange control purposes, you first need to know if the Financial Surveillance Department of the South African Reserve Bank (SARB) regards the beneficiary of a trust as an emigrant (a person who has formalised his emigration via SARB) or as a South African resident temporarily living abroad.
If the SARB views the beneficiaries of a trust as South African residents temporarily living abroad, no capital or income distributions can be transferred abroad and must, therefore, be paid into their bank accounts in South Africa. The beneficiaries can, however, make use of the annual single discretionary allowance of R1 million to transfer the distributions to their offshore bank account. Should the distributions be in excess of R1 million, they can also make use of the annual foreign capital allowance of R10 million, but only after successfully obtaining the relevant tax clearance certificate from the South African Revenue Service (SARS).
However, if a trust has emigrant beneficiaries, the SARB could impose exchange control restrictions on the transferability of distributions from South Africa. The purpose of these restrictions is to firstly ensure that the emigrant is legitimately entitled to the funds emanating from the trust, and secondly, to ensure that capital is not disguised as income transfers.
Knowledge is key when it comes to trusts in South Africa
Therefore, the SARB must first approve the transfer of any income and capital distribution from a trust to an emigrant from South Africa. They will mainly consider the source of the funding of the trust for exchange control purposes, and then use that as a basis to determine the transfer policy. An inter vivos trust will be classified as either an own-asset trust (a trust funded by the emigrant with his own assets in South Africa, for example) or a third-party funded trust (a trust funded by a party other than the emigrant).
- Capital distributions from an own-asset trust will be transferable abroad as part of the emigrant’s annual foreign capital allowance of R10 million, but the beneficiary will have to make a special application to the SARB. A resolution from the trustees of the trust that confirms the capital distribution must accompany this special application, as well as the latest available financial statements of the trust. If the capital distribution is more than the foreign capital allowance, the beneficiary also has to obtain a tax clearance certificate from SARS.
- Income distributions from these trusts, on application to the SARB, will be freely transferable to the beneficiaries.
If the funder is still alive:
- Income distributions may generally, on application to SARB, be transferred abroad, provided that the funding of the trust occurred at least three years prior to emigration.
- Capital distributions will not be allowed to be transferred abroad. Only when the funder passes away, may capital and income distributions from the trust, on application to SARB, be transferable to the emigrant abroad.
Once a trust forms part of a financial emigration application submitted to SARB, any subsequent changes related to the trust, e.g. amendments to the trust deed, changes to the beneficiaries and trustees, must form the subject of an application to SARB. Any additional funding to the trust would also require prior SARB approval.
You need someone you can trust, so get expert advice
The circumstances of each family and trust are unique and it is not easy to manage financial emigration planning on your own. Therefore, it is highly recommended that you get specialist advice, especially about the legal requirements for the distribution of income and capital to beneficiaries permanently living abroad, 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.