US Situs / Estate tax and what is means to South Africans with trusts that own US Shares.
Investors around the world have had good returns over the last 11 years out of the infamous ‘Fang Stocks’ in America. In fact, few investors have performed well if they haven’t held these stocks. Imagine having up to 40% of this value taken away from you, on the death of a beneficiary?
Context:
You are a discretionary beneficiary of a trust (South African or Offshore Trust).
You never visit the USA during your lifetime.
The trust owns shares directly in US companies like Apple, Alphabet (Google), Netflix, Facebook and any other US Shares.
Because you are discretionary beneficiary, you may never be enriched by such assets, via vesting.
The Punch:
Take the context above and add to it some rules from the USA Inland Revenue Service (i.e. IRS).
The IRS does not recognise trusts and deems beneficiaries to have a beneficial right to assets.
The IRS taxes even non-residents on USA property (Situs), which includes Securities (i.e. Shares)
Such tax arises on the death of a beneficiary.
FATCA (which is similar to FICA in South Africa) has made the world a small place and when a beneficiary dies and information feeds into the system, expect a call from the ‘men in black’ representing IRS as Situs tax arises. Sadly, images of the characters from the hit movie normally bring a smile to most faces – regrettably not in this context.
The Hope:
There is mention of the double taxation agreement (DTA) between the countries, with reference to the country in which the beneficiary was resident. However, a look over this agreement between South Africa and the USA, and you will be hard pressed to find anything relating to estates and wealth. DTA’s deal mostly with income. So, this option for a possible exemption – is not available.
The Suggestion:
Situs is present in many countries. The USA came to mind because many strong performing shares from the last decade are USA ‘property’. If you work out 40% of the value of all US shares owned in a trust and consider that the donor/ beneficiary might be old and in the latter years of life, you need to seek the advice of expert practitioners in this field.
Each trust is looked at on a case by case basis, because they are different. We offer such expertise and have allied with Tax specialists that work specifically on this challenge.
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