Leah Mannie, Senior offshore consultant at Sovereign Trust

As global markets grow more accessible and attractive, high net-worth South African families are increasingly looking beyond our borders to preserve and grow their wealth. One strategy gaining traction among those with existing South African trusts is the use of an offshore trust as a beneficiary of their local trust. This mechanism is often referred to as a ‘pour-over’ trust.

A pour-over structure is a strategic concept whereby a South African trust names a foreign trust, typically in an investor-friendly jurisdiction such as Guernsey, Isle of Man or Mauritius, as a recipient of locally accrued assets. Over time, capital and other assets can be distributed from the local trust to the offshore one.

“Pour-over trusts are sophisticated but increasingly becoming a common tool,” explains Leah Mannie, Senior offshore consultant at Sovereign Trust. “Allowing families to transfer capital and assets offshore in a structured, legally compliant way, thus realising significant tax, succession planning, and other benefits.”

Tax and estate planning benefits

For families with global ambitions, those who are increasingly concerned about local uncertainty, and those who wish to protect their financial legacy for future generations, establishing a pour-over structure offers powerful advantages. While local trusts may be constrained by exchange control regulations, evolving tax laws and socio-political uncertainty, offshore trusts can invest freely in international markets, operate outside of South African exchange control limits, and serve as the foundation for long-term family governance and succession planning.

Because foreign trusts offer more robust asset protection, succession flexibility and currency diversification, all while mitigating tax inefficiencies associated with local trusts, they are often preferable to naming an individual as an offshore beneficiary.

“South African trusts are taxed at 45% on income and an effective rate of 36% on capital gains, with very limited deductions. In contrast, offshore trusts, especially those structured correctly with no South African tax-resident trustees, known as discretionary trusts, can legally accumulate tax-free value and growth,” says Vanessa Turnbull- Kemp, Partner:  South African Outbound Structuring at Regan van Rooy.

This tax-exempt status rests on the capital representing after-tax profits that can be freely distributed to beneficiaries. It is also critical that no South African tax resident has a vested interest or retains control over the offshore trust’s income or assets. Income or capital gains earned as a result of that capital may be taxed in South Africa when distributed to a South African beneficiary, depending on the nature of that income, the timing of the distribution and how the foreign trust was originally funded.

Crucially, South African trusts may distribute cash to offshore trusts without triggering donations tax and without the need for loan agreements, even for amounts exceeding R100,000. However, if actual assets (rather than capital) are transferred offshore, the South African Revenue Service (SARS) may levy capital gains tax, which must be settled locally before the distribution is permitted.

Offshore trusts help to preserve wealth across generations by avoiding probate and maintaining confidentiality. And, because assets can be held in multiple currencies, they can shield family wealth from the volatility of the Rand. A further benefit is that a correctly structured offshore trust has the potential to reduce South African estate duty liabilities.

In addition, offshore trusts offer enhanced protection against creditor claims, political instability, and currency depreciation.

Regulatory and compliance considerations

Executing a pour-over strategy involves navigating a complex regulatory landscape.

To start with, the arrangement must be recorded in the South African trust deed and approved by the Master of the High Court. Any subsequent amendments must also be lodged and registered with the Master’s office. Following the Master’s approval, a formal Exchange Control application must be submitted to, and approved by, FinSurv (the South African Reserve Banks’ Financial Surveillance Department).

If the capital amount or value of assets being poured over exceeds R1 million, tax clearance must be obtained through SARS in the form of an Approved International Transfer. Additionally, compliance with global disclosure standards such as the Common Reporting Standard and Automatic Exchange of Information is essential.

“Your South African trust must be fully compliant before any distributions can be made offshore,” Turnbull-Kemp stresses. “If you are not ticking every compliance box, the structure could unravel – with costly consequences.”

A smart way to diversify and de-risk

While pour-over structures unlock a range of benefits, including tax efficiency, asset protection, and estate planning flexibility and security, they are not ‘one-size-fits-all’. Each requires a full understanding of the founder’s goals, coupled with expert advice, careful planning, and compliance with all local and global requisites.

“We always advise South Africans to work with legal, tax, and fiduciary professionals when making important decisions about protecting and growing wealth across generations and jurisdictions,” Mannie concludes. “Whether you already have a South African trust or are considering setting one up, it is well worth exploring how a pour-over into an offshore trust could strengthen your long-term plan.”