Understanding offshore trusts: key differences & considerations for South Africans
As South African exchange controls relax, more wealthy individuals are considering offshore trusts as a means to manage their wealth and succession planning. However, it's important to recognise that offshore trusts are fundamentally different from local South African trusts.
Grant Barbour, Managing Director - Private Client, explores these key distinctions and highlights critical factors to be aware of when considering offshore trusts.
The origins of trust law in South Africa
The marked differences between South African and offshore trusts can be traced back to their legal foundations. Many offshore finance centres have adopted English legal principles for their trust laws. When the English legal system was first introduced to South Africa, the concept of a trust was absorbed, but one key principle, that of dual ownership, was not fully adopted.
As such, a uniquely South African trust concept has since developed, and its relation to the original definition of a trust is loose at best. The key practical difference lies in the concept of ownership – as South African trusts are based on the law of contract, and the country’s Roman Dutch law base recognises only one type of ownership: dominion.
Most offshore trusts, meanwhile, are based on English law’s concept of equity, which recognises two types of ownership – legal and beneficial. The trust is not a legal entity – it’s simply the relationship created between the trustee and the beneficiaries.
Here, following the declaration of trust, the trustee receives the assets, and simply declares that they’re not holding those assets in their own capacity but in a trustee capacity for the beneficiaries of that trust. The beneficiaries are then entitled to expect the trustees to manage the trust property for their benefit.
South African trusts vs offshore trusts: the differentiating features
While the key difference lies in ownership, there are a slew of other differentiating features of offshore trusts that are vital to understand before taking the leap. These include:
- Formalities. As South African trusts are based on contract law, they have to be created in writing. By contrast, an offshore trust can be an oral agreement. But it is more commonly set up through a settlement deed, which the trustee and the settlor sign; or a declaration of trust, which only the trustee signs.
- Protectors. It’s common for an offshore trust to appoint a trusted individual or organisation as a protector, to provide extra security. They tend to have a power of veto over certain powers of the trustee. You don’t typically see protectors appointed to South African trusts.
- Perpetuity. While a South African trust can exist forever, some equity-based jurisdictions have perpetuity periods, and limit the time that assets can be held in trust.
- Amendments. As South African trusts are based on the law of contract, any changes must follow contractual principles. This makes it difficult to amend once one of the parties dies. An offshore trust can be amended whether the settlor is alive or dead, subject to the terms of the trust. It can even be completely restated.
- Addition & removal of beneficiaries. Free of the contractual principles of South African trusts, offshore trust deeds often contain a specific power of appointment, which may allow trustees to add beneficiaries to a trust, or to remove a beneficiary or declare them an Excluded Person.
- Remuneration. In South Africa, the Trust Property Control Act has provisions which allow trustees to charge. In equity-based jurisdictions, the role of trustee was traditionally unpaid. This has evolved over time, but it remains critical to ensure the trust deed contains a clause that allows the trustee to take a fee.
- Registers. South African trusts need to be registered with the Masters Office. Many offshore jurisdictions don’t require trusts to be registered with any official body, or may only require registration if the trust becomes liable for certain tax obligations.
- Revocability. Because of their contractual nature, South African trusts are generally revocable by mere agreement between the settlor and the trustees, provided the beneficiaries have not accepted benefit. Most equity trusts are not.
- The settlor’s role. Known in South African trusts as the ‘founder’, the settlor has a more prominent role in South African trust law than under English-based trust law. In most offshore trusts, the role of the settlor largely falls away once the trust is constituted. While their wishes remain important, this is non-binding.
- Beneficiaries’ rights. In most equity-based trusts, the trustees are answerable to the beneficiaries and not to the settlor. The beneficiaries have certain rights – to force the trustee to do their duty, and to approach the courts if they feel the trustee is failing in that duty.
- Tracing. The beneficiary of an English Law trust has the right to trace any trust property that has been wrongfully appropriated out of the trust, even if it has been substituted by other property. The beneficiary of a South African trust wouldn’t have that right and it would be up to the trustee to claim the return of that property.
- Personal liability of the trustee. As most equity-based trusts lack legal standing, it’s the trustee that acts and enters into contracts in relation to the trust structure. So, the trustee is in most cases personally liable for any debt that they take on during their administration of the trust. English law trusts will often have comprehensive contractual indemnities and limitation of liability clauses built in to contracts, liabilities and deeds. Under South African law, the trustee doesn’t have this concern, because their liability is limited to the value of the trust assets according to statute.
How can Ocorian help?
Given the historical contrasts in legal bases, it's crucial for individuals considering offshore trusts, or advisers assisting clients with such decisions, to fully comprehend the differences and implications involved.
At Ocorian, our trust management team will guide you through the process of setting up the right structure and provide ongoing administration services for all types of trusts including private trust companies (PTCs), managed trust companies (MTCs) and private unit trusts (PUTs).
