Rupert Morris
Partner
Guernsey
As wealth management evolves, South African high-net-worth individuals ("HNWIs") are increasingly looking for efficient offshore structures to protect and grow their assets. One such option is "The Alphabet Trust" - established in Guernsey - a jurisdiction known for its strong legal framework and favourable tax environment.
This article aims to provide an overview of The Alphabet Trust’s offshore structure and outlines certain key benefits for South African families.
Overview of The Alphabet Trust structure
The Alphabet Trust is designed to offer South African HNWIs a tax-efficient and compliant offshore solution.
Key Components:
1. Discretionary Trust in Guernsey
A Guernsey-based discretionary trust (the “Gsy Trust”) is established for the benefit of the "Settlor" (the person who contributes assets to the Gsy Trust) and their family members. A Guernsey-based professional trustee (the “Trustee”) is appointed as trustee of the Gsy Trust.
2. Incorporation of a Guernsey company
The Trustee incorporates a company in Guernsey ("GsyCo"). The GsyCo issues two classes of shares:
- A-Class Shares: Held by the Trustee. These shares have voting and capital rights but limited income rights that differ from those of the B-Class shares; and
- B-Class Shares: Issued to the Settlor, who pays their full value to GsyCo. These shares also carry voting and capital rights but limited income rights that differ from those of the A-Class shares.
Funding the structure
The funding of The Alphabet Trust is a crucial aspect that requires careful planning. By employing a structured approach that includes a series of loans, novations, share subscriptions, and the capitalisation of the GsyCo, the Settlor and their family can take advantage of several South African tax benefits.
Key benefits of The Alphabet Trust
South Africa
The Alphabet Trust offers several potential South African tax benefits for South African HNWIs. These benefits include the possibility of, amongst others:
- the Gsy Trust and GsyCo being classified as non-resident for South African tax purposes, which could reduce South African tax exposure;
- no immediate South African tax consequences associated with the establishment of the structure;
- qualifying for South African tax exemptions on foreign dividends;
- the structure falling outside the scope of the South African Controlled Foreign Corporation rules, ensuring that the net income of the GsyCo is not attributed to South African shareholders; and
- the transfer pricing provisions not applying to the structure.
Guernsey
Guernsey law trusts, governed by The Trusts (Guernsey) Law, 2007 (as amended) (the "Trust Law"), offer a flexible solution tailored to the operational and succession planning needs of South African families. These trusts can be adapted to meet the Settlor's specific requirements, ensuring a perfect fit for the family's unique situation.
One of the standout features of Guernsey trusts is its ability to exist indefinitely. This allows for comprehensive long-term planning, ensuring that the family's assets can provide for multiple future generations. With a Guernsey trust, families can ensure that their legacy will endure.
Upon the death of the Settlor, assets held in a Guernsey trust bypass the probate process and, depending on the terms of the trust instrument, the assets typically remain within the trust structure for the future benefit of the remainder of the family during their lifetime. However, it's important to note that the succession of the B-Class shares held directly by the Settlor will need to be addressed in the Settlor's will separately.
The Settlor can retain a degree of control over the trust assets by appointing a protector or reserving certain powers for himself within the trust instrument. Additionally, drafting a letter of wishes ensures that the Trustee follows the Settlor's instructions even after the Settlor's death.
Guernsey law permits the appointment of professional investment managers to oversee trust and company assets. These experts bring the necessary skills and experience to manage the family's assets effectively, developing customised investment strategies that align with the family's objectives and needs. This ensures optimal asset growth and preservation over time.
The Trust Law offers robust protection against creditor claims, enhancing the security of the family's assets. Guernsey trusts also benefit from a high level of confidentiality, as there is no public register of trusts. This helps maintain the family's privacy and further safeguards their assets.
Importance of professional advice
While the Alphabet Trust structure presents a compelling solution for South African HNWIs, it is crucial to seek professional tax advice in South Africa, tailored to individual circumstances. The complexities of South African tax laws and regulations necessitate a thorough understanding to ensure compliance and to maximise benefits.
Why choose Walkers?
At Walkers, we specialise in offshore trust structures and have deep expertise in Guernsey law and the specific needs of South African families. Our team is well-equipped to assist families and advisors in setting up a compliant and tax efficient offshore structure by working closely with South African tax advisors.
Working with Walkers offers significant advantages, as we possess the expertise not only in establishing the Gsy Trust and the GsyCo but also in appropriately funding the structure by working closely with tax experts in South Africa. This comprehensive knowledge ensures that one of the most critical elements of The Alphabet Trust is managed effectively.
Conclusion
The Alphabet Trust is an attractive solution for South African HNWIs seeking greater tax efficiency and asset protection. By leveraging a Guernsey-based discretionary trust and corporate structure, families can optimise wealth management while ensuring tax compliance.
We encourage you to consult with your professional advisors to explore how The Alphabet Trust can be tailored to your specific needs.
