As more South Africans establish trusts outside the country, Grant Barbour, Managing Director - Private Client, examines the key differences that advisers and individuals need to be aware of.
The relaxation of South African exchange controls means wealthy South Africans now have more freedom to place their assets anywhere in the world. For those seeking to manage their wealth, or to solidify their succession planning, many will be drawn to offshore trusts.
On the plus side, they’ll find a wealth of reputable, stable and well-regulated jurisdictions to choose from – whether that’s Jersey, Guernsey, Mauritius, Hong Kong, Isle of Man or elsewhere. But it’s important to pause here.
There's a common misconception in South Africa that local and offshore trust structures are essentially the same thing. In fact, they’re similar in name only. There are many differences, and they run very deep.
As such, anyone considering offshore trusts can’t afford to be complacent, and neither can their advisers. In order to ensure the effective management and safety of assets placed offshore, its essential to understand the differences between these structures.
The root of the trust issue
There’s a reason for the marked differences between South African and offshore trusts – the majority of offshore finance centres have based their trust law on English legal principles. When the English first came to South Africa, the country’s legal system absorbed the trust concept as smoothly as the society took to rugby. But it didn’t accept one of its key principles – that of dual ownership.
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.
Other critical differences
While the key difference lies in ownership, there are a slew of other differentiating features of offshore trusts that it’s 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 and 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.
Navigating the differences
It’s clear, thanks to historical contrasts in their legal bases, that the differences between offshore and South African trusts are marked. Anyone seeking to take their assets offshore – or to support a client to do so – must understand exactly what offshore trusts are, and what they can do, before deciding to do so.
At Ocorian, we have offices in major international financial centres, so we understand the intricacies of both sides of the coin.
We’re here to help. If you’re interested in offshore trusts and want to know more about the differences, the potential pitfalls and the opportunities, contact me below. You can also view our full range of services for private clients here.