How to avoid probate with investment portfolios

Antony Kelsey
November 4, 2019

Readers of my blogs will already be aware that I am fortunate enough in my role to travel to Johannesburg and Cape Town regularly to meet with clients and to spend time with our amazing team down there. During my recent trip last month, I spent some time thinking about one of the hot topics many intermediaries in South Africa (“SA”) are discussing with us currently: how to avoid probate with offshore investment portfolios.

I know — exciting, nail-biting, white knuckle stuff, eh?! Jokes aside, for many private clients and their advisers probate is a thorny problem. This is because probate is an issue that arises when someone dies and no-one likes talking about death! Hardly a cheery conversation to be relished! In fact if you chat to many advisers, they will tell you it is notoriously difficult to get clients to put wills in place, let alone keep them up to date! So any other planning conversations linked to a client’s mortality can be challenging!

Why does probate come up in conversation so often?

It is because when heirs or will executors seek to take control and distribute the wealth from an estate, probate is usually required in order for the transfer of ownership from the deceased to the heir to take place.

Why is probate problematic?

Firstly, it costs money (it usually requires a lawyer). Secondly, it takes time, generally a lot of time. Finally, it normally needs a lot of patience with form-filling, record keeping and administration. All of this can be particularly challenging at what is typically a difficult time. Moreover, it is often financially frustrating for heirs looking to finalise and regularise their inheritance.

Using a trust to solve probate

So the traditional solution to avoiding probate is to place assets into a trust. This ensures that upon the death of a family member, the trustees, who already own and control the assets, can distribute them in accordance with the deceased’s letter of wishes. The letter of wishes also allows the settlor to indicate scenarios where the trustees may elect not to distribute to certain family members (e.g. divorce, minimum ages and other conditions). A trust may or may not confer estate duty benefits depending on how it is set up.However there are a number of challenges with the use of trusts. Firstly, there are minimum fixed costs annually and at set up, which make a trust affordable typically only for clients with £1 million to invest. Furthermore, within a trust the investment administration and dealing can also be more burdensome and often restrictive. Issues of situs with UK and US investments can also cause trustees reporting issues.

Top alternatives for solving probate:

Endowment or life assurance policies

These allow clients to nominate a beneficiary of the assets upon their death, thereby avoiding probate which can be an attractive benefit. It should be noted that the value remains inside the estate for SA tax and administration purposes. The downside of these policies can be their costs, plus there is tax paid by the life company within the policy which can act as a drag on performance. In addition, the investment options available in these policies can be restrictive.

Investment Account owned jointly.

By holding an investment account in joint names, the account passes automatically to the surviving owner on the death of the first. This route is attractive because it avoids the costs of the endowment or life policy and, when using an open architecture platform, it offers extensive investment flexibility.

It is also possible to put additional holders on to the account over time thereby enabling the account to continue after the death of parents or other relatives. Please note that adding a joint owner to an existing account, where the new owner is not a spouse, will be deemed a donation and donations tax may apply in SA on the donor.

Care also needs to be taken to ensure that the deceased’s executors are aware of this arrangement and that it does not cause conflict with details within the deceased’s will. As with the endowment policy, whilst probate is avoided with a joint investment account, the value is still within the estate for SA tax and administration purposes. This means the account will still be dealt with by the SA executors albeit the offshore administration is simplified.

The final point to this simple joint account arrangement is that it does not deal with the issue of situs. In addition, income and capital gains taxes will need to be paid in an arising basis each year.

Structured note owned jointly

Using a structured note to “wrap” the investment account, and holding it on a joint ownership basis, provides the same benefits as the joint investment account outlined above in avoiding probate. However, it also confers additional benefits in that a tax event should only occur upon any encashment of the note, and not on any investment activity within the note. This therefore can achieve the benefit of true gross roll-up investment performance with little to no tax drag.

Furthermore, the use of a structured note solves the issue of situs. This can make it an ideal solution to making tax administration simpler during an investor’s lifetime as well as on their demise.

Capital International Group do not provide tax, legal or accounting advice. The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG.

CIG provides open architecture Platform arrangements with joint account facilities and can assist in structuring notes that may avoid probate and simplifying tax administration. Please contact CIG for further information.

Continue reading