The curious case of offshore assurance

By Christiaan Wessels

You are probably already wondering what case will now be made for insurance. However, this won’t be your regular discussion regarding insurance pertaining to SA exclusively, but rather what the benefits are of having offshore insurance in place. I won’t keep you guessing any further if this article will be of value to you, I have summarized a few important discussion points.

Why would you take out offshore insurance?

  • If you are interested in overcoming the burden of estate duty in SA
  • You have offshore business interests
  • Offshore trusts
  • Family living abroad
  • Looking to secure capital for dependants offshore so they can pursue aspirations on an international level.

SA Estate Duty: I’ll start with the issue that a lot of South African residents have 

Currently SA estates are taxed at 20% up to R 30m nett of their estates and 25% for everything over and above R 30m. I know there are a lot of deductions that can be made in an estate regarding the 4A abatement, expenses in the estate, liabilities, etc. Most people in this category and above have some sort of structure in place in SA, but usually there are loan accounts involved and other assets in own name. I won’t go into too much detail regarding estate planning, you only need to understand the crux of the problem.

The solution to overcoming your estate duty problem can be to take out offshore insurance where it will pay out to an offshore trust. If you don’t have an offshore trust already set up, you can use a so-called bottom drawer trust to have the insurance paid out. This is a cost-effective trust, and the purpose of this trust would only be to have your offshore insurance pay out here. You are then allowed to leave a letter of wishes to the trustees instructing them to use these funds to pay your estate duty costs. This letter of wishes is always followed unless the letter states something absurd. The capital used to pay your SA estate duty won’t be estate dutiable in SA. 

It therefore can be an option to replace some of your domestic insurance earmarked for estate costs with offshore/dollar insurance.

Offshore business interests

If you have a partner offshore and dealings offshore, you can consider using the insurance as a buy-and-sell structure to buy the shares from each other in the event of death. The shareholding will usually be between trusts or holding companies, but this won’t be problem. You are allowed to fund the premium from an offshore bank account or from your SA bank account, but you will have to reside in SA if you want to pay it from your SA bank account. This should not be a problem as it will in any case be more advisable to fund the premium from an offshore bank account to eliminate currency fluctuations. 

Family already living abroad and funding international aspirations for children

Probably a more common type of plan. It is difficult to leave capital for family/children living offshore if they don’t have any real ties if SA. The issue will be to get the money out of the country with the foreign exchange rules in place. An offshore policy can pay directly into their offshore bank accounts, again free of estate duty.

You can also leave money to an offshore trust via offshore insurance and your children in SA will have the option to pursue international education or setting up in another country. 

How can you get this type of insurance in place?

Be cautious of the fact to implement cover without careful consideration and planning. 

The amount and the purpose of taking out the cover must make sense. It’s important to decide how the cover will be funded, how the partnership offshore looks like and what you are trying to achieve with the cover. 

In conclusion

Do the test to determine if it will make sense to use offshore insurance to pay for your estate duty costs in SA and save 20%-25% in estate duty tax. It can be a substantial saving. 

Address your offshore business risks via offshore insurance to have peace of mind with regards to the value of shares and how it will be bought out.

Keep in mind that it will be better to have an offshore policy pay out to your children, rather than a domestic policy if they are primarily residing offshore.

If you need detail planning and assistance through expert advice around implementing such type of cover, you are welcome to contact me. We assist clients in setting up offshore structures abroad, whether it be for business purposes or diversifying your wealth towards offshore structures.