Offshore investing - How to seamlessly transfer wealth to the next generation and beyond
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When it comes to offshore investing, most high-net-worth individuals and their families have a clear rationale for holding a portion of their wealth in one of the world’s major currencies. They appreciate the value of diversification as a means of hedging against risk, be it financial, political or geographic, and understand the available options and asset classes. Plus, they enjoy the benefits of what has become a relatively painless offshore investment process.
A less explored topic, and a notable pain point for many offshore investors, comes when the conversation turns to structuring and how the investment should be owned.
Pravesh Sunker, CEO of FNB Private Wealth & RMB Private Bank says, “There are times where we find investors are confused by the variety of ownership options and their pros and cons. To address long-term considerations such as generational wealth transfer and investment efficiencies, we designed an exclusive Offshore Funding Tool which is able to illustrate the financial outcomes of retaining investments in a trust structure for one or two generations, as well as the different impacts on a family’s wealth depending on the planning method used.”
The Offshore Funding Tool illustrates the long-term value of an estate-planning structure - such as an offshore trust. The benefit of such a structure can be enjoyed across multiple generations, although the Offshore Funding Tool provides an illustration over two generations. The analysis might also highlight when the benefits of a trust might not outweigh the cost.
The Offshore Funding Tool enables one to compare fees, illustrate the impact of taxation and deceased estate cost implications. It also takes into account the net returns of the various options based on adjustable assumptions such as anticipated growth, dividend and income yields, and various currencies and interest rates. Armed with these facts and assumptions, it then becomes possible to align the needs of the investor with the most suitable wealth succession solution.
“While using the Offshore Funding Tool is a great way to get a helicopter view of investment options over time, experience tells us that a solid understanding of the rationale for using different offshore vehicles is just as important,”says Willem van der Merwe, Fiduciary Specialist at FNB.
Below are some pointers to explore on the available options :
Choosing the right planning structure for your investment - Any investment decision should be made with the overall wealth plan of the investor in mind, as well as considering the investor’s personal circumstances and needs. As a private bank client, your first port of call should be a discussion with your Private Banker, who will bring all necessary experts into the conversation to ensure that all aspects of your offshore journey are being considered in tandem.
The discussions which follow are likely to focus on one of three typical structuring options when investing directly abroad: investing in your personal capacity, making use of an offshore endowment or setting up an offshore trust.
Offshore investing in your personal capacity - Investing in your personal capacity is a great way to start an offshore investment journey. You can, typically, hold unit trusts or exchange traded funds or direct equity holdings and stockbroking accounts in your own name. It’s simple, the costs are relatively low and, because the investments are in your name, you retain complete control.
“In our experience this approach doesn’t always come up trumps when you turn your gaze to the horizon and take into account the importance of asset protection as a risk mitigation vehicle, protecting wealth for the next generation and dealing with the realities of estate planning techniques and tax triggers on death. To guide you through this option, your Private Banker will likely work with your Fiduciary Specialist to guide you through the scenario planning implications and the possible outcomes for your estate plan,” adds van der Merwe.
Making use of an endowment wrapper - An endowment life wrapper is a long-term life policy which enables the holder to nominate beneficiaries in the event of death, whether for ownership or to receive the proceeds of the investment. This means that the wrapper does not have to be administered by the executor of a deceased estate when nominations have been provided – rather ownership of the wrapper or its proceeds are simply transferred to the nominated beneficiary by the relevant life insurance company, thus saving on executor fees.
The wrapper can hold underlying assets which are typically invested with the offshore branch of a South African life insurance company. There are tax benefits associated with this product as well as advantages in terms of simplified deceased administration as referred to above, where probate in other jurisdictions can be avoided.
Setting up an offshore trust - This brings us to the establishment of an offshore trust, a separate legal entity for tax purposes which is based offshore and is administered by the appointed trustees, for the benefit of the beneficiaries defined in the trust deed. The bank works with Guernsey-based FNB International Trustees to set up and administer offshore trusts. It is often our recommendation that founders provide FNB International Trustees with a Letter of Wishes, as this offers guidance and insights to the trustees as to the intention of the Founder, especially after death.
Each of these three options have clear characteristics and benefits. Therefore, selecting the right option always comes down to the individual investor’s estate planning strategy and specific needs.
“For our clients, offshore trusts hold great value as long-term estate planning vehicles, provide the flexibility required in a fast-changing world and act as an asset protection strategy. These trusts can be used to consolidate the wealth of the Investor and can hold assets in various jurisdictions, such as an investment portfolio in Jersey or company shares in the United States.
Having a broad understanding of the various structuring options, coupled with an appreciation of the nature of the assets you have available and your current and future objectives, will enable your advisor to leverage the Offshore Funding Tool to help you arrive at the best investment decision for you and your family’s future needs,” concludes Sunker.