Educational Corner

The value of offshore structures in legacy planning

What is the real value that an offshore trust will add to legacy planning? It can be argued from different viewpoints such as:

  • The cost of maintaining an offshore trust is so high that it adds no real benefit, or
  • The benefit will be eroded by Income Tax deeming provisions and Capital Gains Tax attribution rules, or
  • The long-term benefits of including an Offshore Trust in your estate and legacy planning is so significant that all other factors should be ignored.

 

None of these arguments, with respect, do justice to the individuality and complexity of the legacy planning process. I would always maintain that each case should be considered on its own merits, as I will endeavour to illustrate in this article.

In our first newsletter, I referred to the opportunity for celebrities and sport or music stars to register and protect their Image Rights in Guernsey. The reasoning behind such a registration is that the Image Rights are assets of the individual estates and should therefore be protected, but even more important is to ensure that the commercial value and income generating potential be maximised on the same basis as any commercial business interest. The individual is able to transfer his or her Image Rights to an offshore structure and if managed according to tax and legal rules and regulations, all the income from this asset will accrue to the holding structure. These proceeds can in turn be invested to enhance the value of the assets held by the structure. The individual may or may not be a beneficiary of the structure that would normally be a Guernsey trust owning a Guernsey company, depending on individual requirements, but the important aspect is that a structure has been created that will last in perpetuity and should enhance the value of the original asset for the benefit of the beneficiaries, lasting for many generations.

In essence, the above transaction is the transfer of an asset or assets by a settlor to an offshore trust with the optimal commercial structure in a jurisdiction where no tax will be levied on the income and gains of the structure, thereby removing any growth in value from his estate and putting him in a position to manage his own tax affairs according to his individual position

The same opportunity is available to any investor who is in the position of having assets available to him that may be surplus to his living requirements. Any asset ranging from cash or financial investments to property portfolios or art can be transferred to an offshore trust. The effects of this transfer are:
 

  • The value of the assets for purposes of estate duty will be limited to the amount of any loan accounts that may remain in the name of the settlor
  • The offshore trust will not be taxed in Guernsey
  • The individual tax of the settlor in terms of deeming and attribution rules will be limited and can be managed through investment choices and tax wrappers
  • The assets are transferred in ownership to the trust, so will be protected from unforeseen events affecting any of the beneficiaries. Multi-generational planning can be incorporated in the trust to secure a legacy plan, where the trust can provide financial security to several generations of beneficiaries or to specific classes of beneficiaries.

 

It is extremely important to adhere to the inherent principles of a trust which includes the settlor transferring ownership of the assets and relinquishing all ownership and control over these assets. The settlor should also not be in control of the management of the trust or the decisions regarding the investment of the assets. Any control by the settlor may result in the trust being taxed on its income and gains in the country where the settlor is tax resident. It may also result in a loss of asset protection, as the assets may be deemed to form part of the settlor’s estate.

The reward for the settlor relinquishing ownership and control of the assets can be demonstrated by the following case study:

A South African tax resident, whose SA assets exceed his SA threshold for Estate Duty, also owns assets in the UK that exceed the UK Inheritance Tax threshold. He decides that it is sensible to diversify his assets and is looking to introduce a UK buy-to-let property to his worldwide estate. The property identified is a London flat valued at £600,000. He proposes to use his offshore investment allowance to pay the 30% deposit required on the property and will finance the balance through raising a mortgage loan with a bank.

Through proper estate planning and the use of an offshore trust and company structure, the value of the benefit available to the trust to support his family or trust beneficiaries after his demise is enhanced by more than £300,000 compared to the scenario where he held the property in his own name on demise, based on an assumed ten year period from date of acquisition of the property. This amount is the added value of the assets in the trust through savings regarding Estate Duty, Executor Fees, CGT and IT.

The initial investment in the holding costs of the structure thus produces an added value for beneficiaries of more than £300,000, so even if the initial annual holding costs may seem daunting, the investment in the cost of the holding structure should return very good value in terms of legacy planning.

Each case should be discussed and considered on its own merits and FNB International Trustees has professionals available for personal meetings to provide guidance regarding fiduciary matters. For key contact details, please refer to the bottom of this newsletter.

Rudi Bodenstein
Business Development Executive