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As a financial adviser, some things may seem like common sense. However, put in a position to explain it to someone outside of the industry (especially clients), it may come across as a tad bit more complicated than you might think. This is often the case when it comes to explaining the difference between an onshore and offshore trust. 

That’s why we’re taking a closer look at the basics. 

What is a trust? 

In a nutshell, a ‘trust’ refers to a legal arrangement where one person or entity manages assets on behalf of another person or group. Think of it as a safety deposit box. You (the grantor) place your valuables inside the safety deposit box and appoint a trusted person (the trustee) to hold the key and ensure the items are used and distributed according to your instructions. These instructions can include guidelines pertaining to when and how these items should be given to certain individuals (the beneficiaries).

A trust’s fundamental purpose is to structure how you manage and distribute your assets. Generally, trusts are considered significant and versatile tools and are specifically beneficial in areas such as estate planning, asset protection and tax planning.

What are offshore trusts? 

In brief, offshore trusts are a specialised type of irrevocable trust, mainly used in estate planning. Their popularity, especially amongst South Africans, can be primarily attributed to their broad investment options that aren’t vulnerable or susceptible to political or economic volatility. Although they share many common attributes with their domestic counterparts, their fundamental difference primarily concerns legislation and their jurisdictional placement. Ultimately, the fact that offshore trusts are established in a foreign jurisdiction provides an added layer of protection for assets, enhances privacy, and offers potential advantages in terms of tax management. Many entities prefer investing in offshore trusts to leverage tax neutrality(zero income and capital gains tax), greater flexibility (no exchange control rules to comply with), and even improved succession planning. 

What are local trusts? 

On the other hand, we have local trusts, also called ‘onshore trusts.’ As the name suggests, these types of trusts are established and governed within the residential jurisdiction or country of the grantor. Some standout advantages of local trusts are the fact that they are designed around familiar laws and regulations that align with the grantor’s home country’s legal framework, making it easier to understand, manage and comply with. On the administrative side, local trusts are also far easier to manage due to proximity and easier access to legal advisers. Lastly, depending on the jurisdiction, local trusts may offer greater tax efficiency, including exemptions or reduced rates for certain types of assets.

Another significant aspect to factor in is the fact that local trusts can either be revocable or irrevocable trusts, depending on the specific terms set forth by the grantor. This means that the grantor can modify, amend, or revoke the trust at any time. This often contrasts with offshore trusts, which are generally irrevocable. 

Now, when deciding whether or not to invest in a local or offshore trust, it’s critical to remember that your client’s circumstances need to be taken into high consideration, which is why there is no general right or wrong direction. Instead, consider how each aligns with your client’s long-term investment goals and short-term financial health (PS: Have a look at our previous blog post😉). To gauge which direction is best for your client, you’re going to need one thing – data (and lots of it). However, as financial advisers start taking on more clients with more complex portfolios, gathering real-time information, data, and analytics often comes at the expense of your time and resources. We’re here to keep that from happening. 

Elevate your client segmentation and level up your forecasting capabilities to fully leverage investment opportunities in real-time. Additionally, financial advisers can now rest assured that they have enough time to prioritise other critical responsibilities while knowing their commission and revenue management are taken care of.