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ESTATE PLANNING:
THE BENEFITS OF DRY TRUSTS

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Stanley Broun

Head of Fiduciary and Tax

South Africans holding offshore assets often look to foreign trusts to consolidate, protect and preserve their assets for estate planning purposes. Setting up an international trust can be complex and costly, however, which is why a dry trust – also known as a ‘passive’ or ‘freezer’ trust – may be a better option as a global estate planning tool.

One of the crucial aspects of establishing an offshore discretionary trust is how it will be funded – either via an interest-bearing loan account or a donation. Each of these funding mechanisms will trigger a series of tax events, which could be onerous and may include donations tax, income tax and tax paid on loan interest earned. Besides taxes, the costs of setting up and managing the trust may also be significant.

A dry trust, on the other hand, will in essence only become fully operational upon the death of the funder or testator, and will then become the sole owner of the funder’s assets, as determined in the latter’s offshore will. Since the initial funding requirements are minimal, and due to the dry trust remaining largely passive or dormant until assets are bequeathed to it, there will typically be no income tax, capital gains tax or donations tax payable during the lifetime of the testator.

The mechanics of a dry trust are straightforward. Instead of the beneficiaries – normally those persons that the testator would otherwise have nominated in his or her will – receiving the bequeathed assets from the deceased’s estate, the trust takes ownership of the assets. The beneficiaries will still have access to these assets, but subject to the discretion of the trustees, and in accordance with the trust deed and the testator’s wishes.

During his or her lifetime, the funder of a dry trust will provide the trustees with a letter of wishes clearly setting out how he or she wants the assets to be treated upon death, when the trust becomes ‘active’. This is especially important where the beneficiaries are minors or disabled.

NO FURTHER TAXES

Subsequent to the payment of the relevant estate and/or inheritance taxes on death, once the assets have been transferred as a bequest to the trust, there will likely be no further South African income or estate taxes in the hands of the beneficiaries for as long as the assets remain owned by the trust.

The main benefits of setting up a dry trust are:

  • It’s a useful estate planning tool – the funder will remain subject to the relevant estate taxes offshore as well as local taxes, but once the assets are transferred to the trust on death, the trust assets will fall outside the estate of the trust beneficiaries
  • The assets, once in trust, are protected against political risk, as well as creditors
  • The assets in the trust will be protected from divorce claims against the trust beneficiaries
  • There will typically be no South African income, capital gains and donations tax payable by beneficiaries, once the assets are held and remain in the trust
  • The trustees have the flexibility to invest the trust assets in whichever way they deem fit for the benefit of the beneficiaries.

Through our South African, Mauritian and UK offices, Sanlam Private Wealth can provide customised fiduciary and tax solutions across jurisdictions, including setting up and maintaining dry trusts. Contact Stanley Broun on +27 (0)11 778 6648 or stanleyb@privatewealth.sanlam.co.za for more information.

Expert advice is crucial in dealing with cross-border estate and tax planning.

Stanley Broun has spent 10 years in Fiduciary And Tax.

Stanley Broun

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