South African inheritance & trusts

If you live overseas and are likely to be the beneficiary of either inheritance or trust distributions from within South Africa careful consideration should be given to your status from the perspective of the South African authorities, given the potential impact of exchange control regulations. Without some advance planning there is a risk that payments due to you from either an inheritance or trust source cannot be effected without making retrospective application to the Reserve Bank, and there is no guarantee that the necessary approval will be granted.

For your reference we provide below generic information relating to this important area of cross border financial planning which is frequently overlooked, often with serious consequences.

Inheritances:

If you have not formally emigrated from South Africa:

As a South African living outside the country, you should carefully consider your position if you expect inheritances from family still residing within South Africa. Where the inheritance (i.e. date of death of parent/ family member) precedes the date of formal emigration of the beneficiary living outside South Africa, the funds from the inheritance will be considered as blocked for exchange control purposes.

For this reason, it is essential that those who leave South Africa with the possibility of receiving an inheritance from South African domiciled assets at a later date formalise their emigration with the Reserve Bank even if they have no assets of their own at the date of emigration. Children who leave South Africa without their parents, from whom they could subsequently inherit, are prime examples.

In regard to inheritances (i.e. legacies and distributions from estates in South Africa) accruing to each non-resident or emigrant beneficiary:
• The first amount of R500 000 is freely remittable
• The balance may be remitted upon application to the Reserve Bank, which is a straightforward process
If the beneficiary of an inheritance is an emigrant, it is important to note that such inheritance may only be remitted offshore if the date of their emigration precedes the date of death of the individual concerned.

Where a beneficiary claims to be an emigrant from South Africa, it is incumbent on the authorised dealers (i.e. the approved bank) to call for proof that the beneficiary has been placed on record as an emigrant with the Reserve Bank. Where no such record can be established, the inheritance may not be released without exchange control approval, which is not guaranteed.

As a South African living outside the country it is important to carefully consider your position if you expect to receive distributions from your own or other trusts domiciled in South Africa.

As a general rule, it should be noted that if income from a trust is distributed to you, at a time when you have relinquished your status as a South African tax resident, i.e. formally emigrated, then the TRUST will be taxed on the distribution to you at 40%.

Testamentary trusts:
Insofar as testamentary trusts are concerned, cash bequests and proceeds of legacies and testamentary trusts due to non-resident beneficiaries can be remitted abroad freely, provided that the non-resident heir has formally emigrated

Inter vivos trusts:
Different criteria apply to this category of trust. If the founder or funder of the trust dies then the capital can be remitted without restriction to non-resident beneficiaries and emigrants.

If a third party has however funded the trust, only income earned on the capital can be remitted offshore provided the funding was in place at least three years before the beneficiary emigrated.

If the beneficiary was the third party funder of the trust and then emigrates, the capital cannot be remitted until the death of that emigrant beneficiary.

It is to be noted that the 8th Schedule of the Income Tax Act does not provide for a capital gain to be distributed to a non-resident and the gain is taxed at 20% in the Trust's hands.