FINANCIAL WELLNESS COACH: US asset may not be the best bet when it comes to estate planning

South African residents owning US‑based investments risk punitive US estate tax, cross‑border probate and cash‑flow pain.

I have R10-million invested offshore in an S&P 500 index unit trust. The money was transferred into dollars using my offshore allowance. I have heard that offshore investments can delay the winding up of an estate if they are not structured correctly. Is this true and, if so, what can I do about it?

Because your investment is legally situated in the US, it may create three major problems for your estate: US estate tax; cash flow issues in the estate; and long and expensive delays in finalising the estate.

South African residents are generally liable for estate duty on their worldwide assets. This means your R10-million US investment will form part of your South African estate, even though the money is held overseas.

The US may also charge estate tax because the investment is legally situated there. For someone who is neither a US citizen nor resident, the US estate-tax process can apply where their US-situated assets exceed $60,000. US estate-tax rates work on a sliding scale and can reach 40%. This is significantly more than South African estate duty.

The next problem is access to the money. When you die, the US investment may be frozen, and US estate tax may have to be paid before the US asset can be sold or transferred. Your executor could be forced to sell South African assets to raise cash to pay the US tax.

The US tax authority indicates that one of the clearance processes for a non-US estate can take between 12 and 18 months once all the necessary information has been received. During this time, your family may not be able to access the investment.

Your local executor will probably need help from US legal and tax specialists. Documents may need to be sealed, sent overseas and accepted by the US investment provider and tax authorities. This adds costs and delays.

It may also delay the rest of your South African estate. Your executor cannot finalise your local estate while a major asset remains unresolved in another country.

This is often the biggest frustration for a family. They know that the money exists, but they cannot access it when they need it.

A possible solution is to place the offshore investment inside a properly structured offshore life policy wrapper. The underlying money can remain offshore and continue to be invested in the S&P 500 or any other global investments.

The main difference is what you legally own. At present, you own an investment that is legally situated in the US. Inside the correct wrapper, you would own a policy issued by an insurer. The insurer would own the underlying US investments.

This distinction can remove the US estate tax and probate problems connected to personally owning the US-situated assets.

The policy will still be included when calculating your South African estate duty, but will not attract situs tax or probate costs.