A Dry trust, also referred to as a ‘passive trust’ or “freezer trust” can be a very useful international estate planning tool. Given the many complexities in establishing an international testamentary trust, the dry trust is a cost effective alternative as it allows the settlor to bequeath offshore assets to the trust upon death, and often at death of the last dying spouse where the heirs are minor children. The Dry Trust is therefore typically used where the settlor/last dying spouse wants to bequeath his/her offshore assets to his/her children, but would like for their inheritance to be held in a trust for their protection. As South African trusts are precluded from holding offshore assets in terms of exchange control regulations (except by way of asset swap) and given the many complexities in establishing an international testamentary trust, a Dry Trust is a suitable alternative. The Dry trust, given that it will already be in existence at the time of a settlor’s death, is therefore specifically nominated as the sole beneficiary in the offshore Will and the trust remains effectively passive until the settlor’s/last dying spouse’s death. Nominal fees are paid to keep the dry trust in place until it receives the bequests. Only after receiving the bequests will the full offshore trust fees be applicable.
The mechanics of the trust is relatively straight forward in the sense that the trust beneficiaries are normally those persons who the settlor would otherwise have nominated in his or her Will and upon his/her death the trust, instead of these beneficiaries, will receive the bequeathed assets from the deceased’s estate. The settlor will, during his or her lifetime, provide the trustee/s of the trust with a letter of wishes which clearly sets out his or her wishes in respect of how the trust assets should be treated after his or her demise. This becomes very important especially where the beneficiaries are minors or disabled.
On date of death the deceased estate of the settlor/last dying spouse will still be subject to the relevant estate taxes etc., however, once the assets have been transferred as a bequest to the trustees of the dry offshore trust, no further South African Income or Estate taxes are foreseen in the hands of the beneficiaries for as long as the assets remain in trust, in terms of legislation as at the date of writing this summary.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)