Trust have existed for more than 500 years and the last century has seen the emergence of different forms of trusts ranging from charitable trusts, to asset protection trust to discretionary trust. The BVI has recently come up with a varying form of Trust called the Vista Trust whereby the settlor retains some form of control over the assets he settles into the Trust.
Trusts are set up for different reasons but the most common ones are for assets protection and privacy goals.
A popular planning option to avoid concerns over litigation is to set up an asset protection or discretionary Trust. In this event, assets are settled into the discretionary trust by the settlor. These assets are then legally regarded as the assets held in Trust and owned by the Trustee (which is normally a professional trust company). In the event the settlor faces legal proceedings by creditors, the assets held in the Trust cannot be used to settle his debts as they are not legally his assets.
With the declaration of amnesty on exchange control transgression in South Africa, South African investors have been re-thinking other mechanism through which to hold their assets.
From a South African perspective, it would seem that a number of problems are associated with offshore trusts however trusts are still used extensively by other people.
Over the past years there has been a succession of judgments internationally which have overturned assumptions about trusts that have held for the past century. As a result, South African investors are encountering serious difficulties in the use of offshore trusts.
The South African farmer who has an average education may find it hard to settle his hard earned funds into a Trust whereby the Trustee becomes the legal owner of that asset and he has little or no control. One way of circumventing this control issue is to have the settlor cumulate the role of protector. However, by cumulating both functions, the court may view the trust as a sham trust and the trust declared void. For a Trust to be valid there should be a genuine transfer of assets from the Settlor to the Trustee. In addition, there should also be a clear distinction between who settles the assets in the Trust and the identification of beneficiaries for the assets held in Trust. Obviously if a Trust has the same settlor and beneficiary the question will be asked as to what is the real purpose of the Trust?
Therefore a trust may also be declared void in the event the court is of the opinion that the trust has been set up to protect the settlor’s funds against creditors, spouses or tax authorities and that the settlor has used devices, such as letters of wishes, to keep control of the funds.
New forms of offshore vehicles
Due to the difficulties associated with Trusts, potential investors may consider the following alternative or complimentary offshore vehicles:
- Global Business Companies (GBCs);
- Limited Liability Company
- Companies limited by guarantee
- Contractual arrangements, such as an option or an agency;
- Contractual relationships relating to possession, such as bailment;
- Offshore variable life insurance policies; and
- Various pour-over devices whereby assets and rights can be moved from one vehicle to another.
Global Business Companies ("GBC") are the term used for offshore companies that are set up in Mauritius. Two types of GBCs’ can be set up namely GBC 1 and GBC 2. GBC 1 benefit from the double taxation avoidance treaty network of Mauritius whereas GBC 2 are very similar to BVI IBCs’. Setting up a GBC allows the shareholder to retain control of his assets as opposed to a Trust whereby the assets are settled into Trust and legal control lost.
To add another layer of safety, the GBC can be set up as a limited liability company (LLC), which can be used either independently or in conjunction with an offshore trust. The GBC will have minimum assets and will be responsible for the operational side of the investor affairs. Profits realized by the LLC are distributed as dividends to the shareholder which can be a Trust. In the event of legal action by creditors, the liability of the investor is limited to the assets held in the LLC.
The LLC is able to provide what many clients need in an offshore structure: corporate personality, limited liability, minimal administrative requirements, asset protection, no loss of control and minimal disclosure (depending on the type of GBC that is set up)
A company limited by guarantee comes straight from the companies acts internationally modelled on English law, and is being used as the Anglo-Saxon version of the foundation, which is often used in Europe.
Another strategy is taking benefits through contract planning, rather than through ownership planning, in particular through offshore life assurance products. This comes in many forms, one of the best being a with-profits endowment policy, with a single premium.
The key planning device lies in the following principal feature: the policy may be on a single life, joint life or multiple lives last-death basis. The policy generally allows investment in a wide range of different underlying investments, enabling a personalised portfolio to cater for specific needs. Underlying investments include offshore funds or authorised unit trusts, managed, sector and specialised funds, stocks and shares, fixed interest securities.
The facility to transfer existing shareholdings and other assets straight into a policy is useful, and in this way an existing trust could simply be backed into the policy.
Assets may also be placed in an executive investment bond, which may combine the flexibility of a personal investment portfolio with the advantages of a whole-of-life policy. The investment can be automatically split into a number of separate policies. Each policy can then be partially or completely cashed in the future, without cancelling the entire bond.
Policyholders can also take regular withdrawals to provide an income, perhaps on a monthly or annual basis, though an early withdrawal charge may apply to the withdrawal, income payment or full or partial surrender. The bond thus offers the option of taking withdrawals at regular intervals, providing a steady source of income.
"In South Africa there have been major changes since 9/11 with the introduction of the Prevention of Organised Crime Act, the Financial Centre Intelligence Act, the Financial Advisory and Intermediary Services Act, and other regulations and controls. There are now many new tax treaties containing exchange of information clauses. The South African Reserve Bank and the South African Revenue Service now share information. All these, in addition to the powerful new tax collection system and the grey money amnesty itself, militate in favour of the assumption that secrecy of financial information is a thing of the "past."
Having said the above, a Trust remains a very effective device for asset protection provided it is not done with an intention to defraud creditors or evade tax etc. The key word to set up a valid trust is "Honesty".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
