Demystifying US Situs tax

In this webinar Stan Barg, partner at Kozusko Harris Duncan, considers US based investments held by many and provides guidance on whether these assets require an offshore estate administration process and are subject to foreign estate taxes.

Sarah Simson

Head: Fiduciary,
Sasfin Wealth
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In this session we gave clarity to:

  • Which investments are subject to US Situs, such as cash in bank accounts, unit trusts, US shares, US shares held through nominee accounts and US property
  • How estate planning impacts an investor’s choices in respect of US investments and why estate planning is a critical consideration when deciding on a suitable offshore investment product

Endowments: The benefits of wrapping offshore investments for local investors. For investors looking to invest offshore it is advisable that they explore the option of having an investment wrapper that will help them achieve their goals in a more efficient way.

ENDOWMENTS: THE BENEFITS OF WRAPPING OFFSHORE INVESTMENTS FOR LOCAL INVESTORS

With sluggish economic growth, a volatile rand and uncertainty about political and social stability, South Africans are increasingly looking for offshore investment solutions to hedge their portfolios against local risks. For investors looking to invest offshore it is advisable that they explore the option of having an investment wrapper that will help them achieve their goals in a more efficient way. Wrapping an investment in an offshore endowment offer local investors numerous advantages which are discussed in this note.

 

ENDOWMENTS AND UNDERLYING INVESTMENTS

A local investor should consider using an offshore endowment primarily for tax and estate planning purposes and not solely for investment purposes. An endowment is an investment wrapper that holds an underlying investment fund or portfolio. An investor has a wide range of investment choices and depending on the platform chosen the investor can elect to invest in exchange traded funds, unit trusts and offshore personal share portfolios during the investment period. At Sasfin Wealth we partner with offshore platforms to create personalised investment solutions. These bespoke solutions could come in the form of unit trusts or share portfolios which include some of the world’s most distinguished and attractive brands.

 

WRAPPING OFFSHORE INVESTMENTS FOR ESTATE PLANNING PURPOSES

From an estate planning point of view, wrapping offshore investments in an offshore endowment offers immense benefits. Endowments allow the investor to nominate beneficiaries which means that on the investor’s death, the investment can be payable directly to beneficiaries without requiring them to wait for the estate to be wound up. The investor can also nominate a beneficiary for ownership in order to inherit the investment and become the new policyholder on death. No executor’s fees will be charged on the amount paid out, but it will form part of the estate and will still be subject to estate duty. Furthermore, if an offshore endowment is used, the insurance company as the life company is the owner of the shares which means the investor will avoid any Probate requirements related to any foreign jurisdictions and avoid having to pay any Situs tax in any offshore jurisdictions.

 

WRAPPING OFFSHORE INVESTMENTS FOR TAX PURPOSES

An offshore endowment is an insurance linked investment vehicle that is subject to tax in South Africa. The life company pays tax as per the five funds tax approach as stipulated in the Income Tax Act of 1962. Investment returns within an endowment are taxed at a fixed income tax rate of 28% for corporate policyholders and 30% for individual policyholders. The effective tax rate for capital gains is 22.4% for corporate policyholders and 12% for individual policyholders. The direct taxation within the product, is an important benefit as it simplifies tax administration for the investor who will receive a tax certificate annually for any taxes that have been paid.

 

OTHER FACTORS TO CONSIDER WHEN USING AN ENDOWMENT

Before committing to using an endowment structure for offshore investment purposes, an investor should also consider the following factors:

 

Liquidity: An endowment normally has a five-year restriction period with an investor being allowed to make a single withdrawal within the restriction period. The maximum withdrawal amount available throughout the restriction period can be no more than the investment amount plus 5% compound interest per year. After the first five years the investor may make any number of withdrawals.

 

Costs: Before committing to use an endowment, it is advisable to fully research in detail the costs associated with such structures, as well as any penalties applicable to an early surrender.

 

Minimum investment amount: The minimum investment amount varies for every platform. The lowest investment amount for the platforms Sasfin Wealth utilises is US$18 000 (or the currency equivalent).

 

Additional contributions: An investor may make additional contributions into an endowment, although there are restrictive rules. The rules are that during the first year there is no limit to the number of contributions you can make into an endowment. In the second year you may add 20% or more above your total contributions in the first year and thereafter you may add 20% or more above the higher of the previous two years’ contributions. If you add more than the amounts stipulated above, then a new application will need to be made as a new contract will be issued for the excess which will have its own restricted period of five years.

 

Before using any investment wrapper or product it is important to assess various product features and align them to your needs. Although wrapping your offshore investments in an endowment offers various potential benefits it is important to seek professional advice from a Wealth Advisor before committing to a long-term investment.

About the Author

Sarah Simson
Head: Fiduciary, Sasfin Wealth