Last month on our blog, we covered inter vivos trusts and what they’re used for, while taking a look at the exchange control implications for offshore beneficiaries. This time around, our exploration of types of trusts in South Africa turns to testamentary trusts. As a South African living abroad, if you left family behind when you emigrated, there is a chance that you might find yourself the beneficiary of a testamentary trust in the future. With this in mind, let’s shed some light on some of the most frequently asked questions about testamentary trusts in South Africa.

What is a testamentary trust in South Africa?

By definition, a “testamentary trust” is a trust that is established in a person’s Last Will and Testament. As such, it comes into effect only after the person (known as the ‘testator’) has passed and their Will has been read, and the trustee has been authorised by the Master of the High Court to administer the trust.

What is the purpose of a testamentary trust?

In South Africa, a testamentary trust is a legal arrangement in which an individual’s assets are placed within a trust with the intention of benefiting their heirs or named beneficiaries after the testator’s death. (By contrast, an inter vivos trust comes into being during the lifetime of the individual who established it.)

The primary purpose behind establishing a testamentary trust in South Africa is to prevent the potential misuse or depletion by the beneficiaries of an individual’s assets after their passing. A testamentary trust is also typically used to provide for minors or beneficiaries who lack the capacity to handle their finances independently. This form of testamentary trust has the advantage of shielding assets from creditor claims and ensures that the assets can be dedicated to specific purposes, such as taking care of the beneficiary’s medical or educational expenses. In this way, a testamentary trust can act as a protective legal entity for beneficiaries with mental or physical incapacities that limit their ability to manage their own affairs.

Testamentary trust requirements

The individual appoints a trustee in their will, and after their death, the named trustee assumes responsibility for overseeing the management of the assets in the trust and facilitating their distribution according to the deceased’s wishes, as outlined in the terms of the trust agreement. In the case of a testamentary trust in South Africa, the deceased’s last will serves as the trust agreement. It will include the names and ID numbers of the trustees nominated, as well as their duties and powers. It will list the names and ID numbers of beneficiaries, as well as the purpose of the trust itself, which is to protect the trust assets in the best interests of the beneficiaries.

What happens when a testamentary trust beneficiary lives outside of South Africa?

How the beneficiary receives their income will depend on whether the beneficiary is regarded as a South African resident or non-resident for tax purposes. A tax resident is someone who meets the requirements set out by the South African Revenue Service (SARS) in determining tax residency – namely the ordinarily resident and physically present tests.

However, tax residency is not linked to physical residence and a South African living abroad can still be considered a tax resident, by virtue of the physical presence test if they return to South Africa often enough, whether for family visits, holidays or business. Furthermore, until an individual has officially ceased tax residency with SARS and completed the process of tax emigration, they are still technically considered to be resident for tax purposes.

What does this mean for offshore beneficiaries when it comes time to receive their distributions? It means they will have to clarify their tax status with SARS before they can receive their payments overseas. Let’s take a look at how this works, with two common scenarios.

How to transfer money from a South African testamentary trust to beneficiaries offshore:

Scenario 1: South African tax resident living abroad

• Mr Clark established a testamentary trust in South Africa for his daughter, Cindy who is the beneficiary. He named his brother as the trustee and stipulated that Cindy is only to receive her inheritance from the trust – an amount of R2.3 million – on her 25th birthday.
• Cindy emigrated with her mom to the UK when she was 17. Cindy has now just turned 25 and still lives in the UK.

Solution: Since Cindy left South Africa when she was still a minor, she would never have recorded a formal emigration with the South African Reserve Bank nor ceased her tax residency with SARS. This means that she will be regarded as a South African resident temporarily abroad.

In order to receive her inheritance she must register for tax with the South African tax authorities and apply for an Approval – International Transfer TCS PIN from SARS, after which she will use her Foreign Investment Allowance to transfer the funds overseas. A mouthful, but doable with the appropriate guidance.

Scenario 2: South African non-resident for tax purposes

• Mrs Jones established a testamentary trust and named her daughter as the trustee, to hold assets in trust for the benefit of Mrs Jones’ granddaughter, Rebecca.
• Rebecca is set to receive her trust inheritance on her 30th birthday. She emigrated to Australia when she was 26 in 2019. She ceased her tax residency with SARS in 2022, and still lives in Melbourne. She just celebrated her 30th birthday and is getting ready to receive her R3 million inheritance from her grandmother.

Solution: Since Rebecca has already ceased tax residency, she is regarded as a South African tax non-resident. To receive her inheritance she must have an active South African tax record and apply for a Tax Compliance Status PIN – Good Standing from SARS to transfer her inheritance abroad. As she is a non-resident, there is no limit to the amount she can transfer offshore, as long as she is in good standing with SARS and can verify that the sources of her funds are legitimate.

FinGlobal: cross-border financial specialists for South Africans abroad

Looking for someone to simplify transferring your South African inheritance overseas? FinGlobal can help. We’re ready to help you clarify your tax residency status with SARS, and show you the right exchange control and tax approval procedures to follow to get your money safely transferred out of South Africa.

To get started with FinGlobal’s hassle-free, secure service, leave your contact details in the form below and we’ll be in touch to discuss your requirements.