South Africa's financial uncertainty has prompted many people to look for ways to secure their assets for their children's future. Recent changes to Sars’ Tax Compliance Status requirements, specifically with reference to exchange control, emigration and Foreign Investment Allowance types, have further fuelled these uncertainties. In simple terms, reporting requirements of worldwide assets are now becoming increasingly stringent and apply even to those with a non-resident tax status in South Africa.
Theoniel McDonald
How then, can one externalise and safeguard assets for the benefit of one’s children?
Not everyone can accumulate enough wealth to externalise their assets feasibly and move them offshore outside of South Africa. One of the challenges are that at your death, your children are likely to inherit the global funds bequeathed to them, and it will once again become part of their South African estates. This is where the idea of what is known as a Dry Trust comes in.
Here’s how it works. A Dry Trust is an estate planning tool that becomes active only after the death of the grantor. It is used in many countries as an alternative to a traditional Testamentary Trust. Once the Dry Trust is registered, the trust is completely independent, and any global life insurance or endowment policies can be bequeathed to this trust. At the death of the policy holder, the trust becomes active and receives the benefit as per the beneficiary nomination of the policy.
Normal offshore trusts are usually expensive to set up and even more expensive to maintain. This is largely due to the trustee fees, along with the accounting and other administration fees. The Dry Trust provides an alternative that is cheaper to maintain as it remains dormant until the proceeds are received. At this point the trust will likely have enough capital to fund the expenses of the then active trust.
Creating a Dry Trust can provide a way for South African families to de-link their children's assets from South Africa, providing a buffer against possible future financial failure in the country. Although the assets or life insurance bequeathed to this Dry Trust will still be an asset in your estate for estate planning and capital gains purposes, the trust itself is independent and, therefore, a way to benefit your children in the future.
These trusts are usually established in tax havens, and therefore, your children will benefit from any further growth being completely independent from South Africa. In other words, it won’t form part of their estates for estate duty and capital gains tax purposes.
Creating a Dry Trust can give South African families peace of mind, knowing that their children will have assets outside of South Africa that are completely independent. These funds can be used for studies, settling abroad, or the children can bring back to South Africa the money should they decide to do so.
While this may not be a solution for everyone, it is worth considering for those who want to secure their children's future in uncertain times.
* Mc Donald is Managing Director of Wealth Associates Central, Strategic Marketing Director of Wealth Associates South Africa, and is Vice President of the Financial Intermediary Association.
** The views expressed do not necessarily reflect the views of IOL or its sister publications.
PERSONAL FINANCE