Guernsey trust structures for South African-based clients offer security as well as succession planning benefits

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Guernsey trust structures for South African-based clients offer security as well as succession planning benefits

The use of trust structures in Guernsey has traditionally been a well-known estate planning method for ensuring the protection of assets against national or global instability, the preservation of wealth on an inter-generational basis, as well as procuring certain tax efficiencies in respect of the assets and income held via such trust structures. This is because the use of a trust structure, particularly one established in a well-regulated offshore financial centre such as Guernsey, often gives rise to certain tax efficiencies insofar as the onshore taxation of these assets and income is concerned. It also generally locates the assets in question outside of the onshore jurisdiction from a legal point of view, including on the death of the settlor or a beneficiary, without the person in question having to relocate their residence offshore themselves.

This has been attractive in recent years to South African high net worth families, given the legal position in South Africa in terms of which holding assets via an offshore trust structure gives rise to certain benefits and savings from a South African tax (both in terms of income and on an inheritance basis) point of view. In addition, the recent passing of legislation in South Africa which allows expropriation of private property in South Africa with nil compensation has given rise to concerns, and the need as a matter of prudence to secure assets against such risks on an offshore basis.

Typically, the offshore structure involves setting up a Guernsey discretionary trust, which holds as trust assets the shares of a company incorporated in Guernsey. Such shares are divided into at least two classes, with differing rights as to dividends attaching to each class of shares. It is also usual (and invariably material from the point of view of the onshore tax treatment of these assets and income) to have the trust and the underlying company administered in Guernsey by a licensed entity which acts as trust administrator and company resident agent respectively.

The shares in the Guernsey company are divided into classes, with the first class being shares held by the trustee itself, and the second class being issued to the settlor of the trust (or another party or parties). The voting and/or rights to dividends if declared vary as between the two classes, with the trustee shares usually receiving a lesser proportion of any dividend declared, as compared to the rights of the other class of shareholder who tend to receive a greater proportion of any dividends declared.

There is a degree of flexibility afforded within this basic structure, which also allows a settlor and his or her family to structure the classes of shares accordingly between them. The precise nature of these arrangements requires careful liaison with onshore advisers in order to make sure the structure and its funding falls within the scope of South African legal requirements. In addition, the funding of the trust’s purchase of shares, as also of the shares purchased by the other classes of shareholder, must be carefully considered.

In order to be successful, a close liaison is required between onshore legal and other advisers, and the offshore legal advisers instructed to establish the relevant trust and underlying Guernsey company. It is material that the legal content of each of the trust instrument and company constitutive documents should be tailored to meet both Guernsey legal requirements as well as the requirements of the onshore advice received in respect of the structure. It is imperative that the advisers be aligned as to the issues and the subsequent execution of elements under the structure. It is also key from a practical point of view to work with an efficient and responsive administrator for both the trust level as well as the company administration level of the structure, to make sure the required steps are taken in a timely manner and with proper records kept.

Abt has substantial experience in providing legal advice on Guernsey trust and company law, and is well-placed to assist with the establishment of the sort of offshore structures discussed in this insight article. We have in addition to our expertise in Guernsey law also the benefit of expertise in South African law, and familiarity with South African taxation and inheritance law matters. If you wish to discuss establishing such a structure, please contact our partners Jeremy Le Tissier and Clare Tee, or our senior associate Nick Taitz (an attorney of the High Court of South Africa) who would be delighted to arrange a consultation.