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20/04/2018

The Cost of Dying has Just Gone Up

Estate planners and administrators must take note of recent cost increases. Master’s fees, VAT, estate duty and donations tax rates have increased.

In the Minister of Finance’s recent 2018 budget speech, he announced the increase of VAT to 15% from 14% with effect from 1 April 2018. Most professional executors and trustees should be registered VAT vendors.

Executor’s fees are generally 3.5% plus VAT. At 15% this will equal 4.025% of gross assets. For an estate of R5 000 000.00 this represents an increase of R1 750.00. Effectively there will be an increase of R350.00 for every R1 000 000.00 of the gross estate.

An estate requires the provision of other services such as the conveyancing of fixed property, tax returns and financial statements by accountants, and sworn appraiser or valuation fees. Most of these will be affected by the VAT increase.

Fees due to the Master of the High Court by the deceased estate were increased on 1 January 2018. Previously these fees could never be more than R600.00. This level was reached around the R200 000 gross assets mark.

In terms of the new regulations Master’s fees are capped at R7 000.00 – once the gross estate reaches R3 600 000.00. A new sliding scale applies – last changed in 1983, the new rates are a substantial increase.

The administration of testamentary and inter vivos trusts is often carried out by professional trustees. The new VAT rate will apply to their annual administration fee and other services.

The estate duty rate of 20% was increased to 25% for persons dying on or after 1 March 2018 for the portion of the dutiable estate that exceeds R 30 000 000.00 only. So 20% will apply up to R30 million (R6 million) and 25% will apply for each rand above that.

Donations tax is 20%, but from 1 March 2018 a donation (or donations) in excess of R30 million in one tax year will attract tax at 25% on the value in excess of R30 million. It is, therefore, still in line with estate duty.

Of most concern was the mention in the budget review that the “official rate of interest” – currently equal to the ‘repo rate’ plus 1% (7.5% p.a. as of 28/3/2018) – should be increased to the ‘prime rate of interest’ charged by local banks, which is currently around 10% p.a.

The official interest rate is used, among other things, to calculate the deemed donation brought about by section 7C of the Income Tax Act, on non-interest bearing or low-interest loans between ‘connected persons’ and trusts. This is a common estate planning tool that has proved to be very effective.

The prime rate of interest takes into account the banks' risk margin and, therefore, it seems inappropriate to invoke such a rate rather than say a money market rate. Whether this idea sees the light of day remains to be seen.

It is important to note that the need for liquidity does not end upon the winding-up of an estate. The trustees of the resultant testamentary trust also need money to pay the trust bills and this is often overlooked by clients. Only having fixed assets in a trust is not good enough to sustain the trust until, for example, all the beneficiaries have attained the age of majority or become entitled to the trust capital.

The increase in estate duty and donations tax rates means that the use of trusts in estate planning becomes even more important in the view of experts in the field. With inflation running at about 5% p.a. assets can grow enormously in value over one’s lifetime.

All of this means that the liquidity of an estate and trust – which is already a major problem for executors and trustees – requires more scrutiny. More money will be needed. Cash in the bank and life insurance paid to the estate and/or testamentary trust must be planned for by financial planners.

Article written by David Thomson, Senior Legal Adviser, Sanlam Trust.

13/04/2018

02/03/2018

ALL ABOUT TRUSTS

Historically, people whose estates have been potentially liable for estate duty have been advised to move – often on an interest-free loan account – all paid-up personal assets into their family trusts in order to save on the duty.

However, if the loan has not been repaid by the time of your death, it will constitute an asset in your estate. In many cases, as a result of transferring depreciating assets into a trust, the loan value included in the estate is much higher than the value of the assets.

To make matters worse, if the trust is unable to repay the loan, the executor could have the trust liquidated before winding up the estate. This might unnecessarily expose other assets in the trust.

In an attempt to prevent freezing the value of an estate by moving growth assets into a trust, the South African Revenue Service (Sars) introduced an anti-avoidance provision (section 7C of the Income Tax Act), which became effective on March 1, 2017. In terms of this measure, Sars will, through the introduction of a deemed donation on interest-free loans made to a trust, attack any arrangement that attempts to exclude growth in your personal estate. Effectively, the estate planner has to pay “death taxes” on the potential growth during his or her lifetime.

The landscape for trusts has changed, and estate owners have to understand that they cannot use trusts in the same way as they did before March 2017.

Estate owners have to be careful about which assets they want to protect in a trust and, apart from sentimental assets, focus on moving into a trust high-growth assets and assets they want to protect from creditors.

Remember that it is not always simply about the tax savings or the additional taxes payable on assets transferred to a trust; it is also about a strategy to protect your assets, and to create continuity and liquidity upon your death. There are other considerations, such as a contingency plan in the event that you suffer from Alzheimer’s disease.

If possible, estate owners should undertake proactive estate planning and purchase assets directly in a trust before their value increases in the hands of the estate planner.

Should a trust own immovable property?

For the purposes of estate duty, transferring immovable property into a trust ensures that any growth in the value of the property is contained within the trust, rather than in your personal estate.

Your assets are also protected from attacks by your creditors and/or the creditors of any companies that you own and for which you have signed sureties.

Upon your death, your properties outside a trust will be caught up in your frozen estate. Your spouse and dependants and other people will not have access to these assets – the properties themselves or any rental income that they might be generating – until your estate is wound up. This could take many years.

If your primary residence is registered in your name, it will form part of your estate, and the beneficiaries and the executor will decide what will happen to it. This will be based on what you have stipulated in your will.

If there is insufficient liquidity in your estate, the executor may be forced to sell the property to generate cash to pay estate duty. Holding the property in a trust would eliminate this problem and ensure continuity of income and tenure for the beneficiaries of the trust.

If you hold your primary residence in your personal name, your death will trigger capital gains tax (CGT) – a deemed disposal – subject to the inter-spousal roll-over provisions, regardless of whether the property is sold or retained by the family.

If the property is held in a trust, death will not trigger CGT, and it can be passed on for generations without triggering CGT. The tax will be payable only upon the actual sale of the property by the trust.

However, you have to take into account that you will lose the R2-million primary residence exclusion for CGT purposes if you sell the property out of the trust, rather than out of your personal name.

Luckily, the punitive provisions on interest-free loans in terms of section 7C of the Income Tax Act exclude loans related to primary residences.

The decision to move your primary residence into a trust depends on your individual circumstances. The general rule of thumb is to consider moving any property into a trust only if you plan to hold it for a long time, or if you want to protect it from your creditors.

Should a trust own shares in a company or a member’s interest in a close corporation?

The main reason to house in a trust shares in a company or a member’s interest in a close corporation should be to protect such assets from creditors. Business owners are often required to sign sureties in their own names, and this may expose the shares or member’s interest to creditors.

Furthermore, the growth on the shares and the member’s interest may be captured in the trust, thereby avoiding estate duty on such growth.

Since 2005, an inter-vivos trust can own a member’s interest in a close corporation if certain conditions are met.

Should your life assurance pay out to a trust?

The main aim of taking out life assurance is to provide liquidity in an estate to pay estate duty, a mortgage bond liability, vehicle finance agreements, taxes and winding up costs, such as executor’s fees. Otherwise, the executor will have to sell assets to pay these costs. However, if most of your assets are held in a trust, this may not be such a problem.

Many South Africans are under the impression that payouts from life policies do not form part of their estates for tax purposes. This is a misconception, because the calculation of estate duty includes both property and deemed property, such as most life policy payouts. Structuring life policies in a trust reduces the estate duty and eliminates the executor’s fees thereon.

If the possibility of a trust-owned policy has not been considered, you need to ask whether your financial adviser has conducted an adequate financial needs analysis.

Even if Sars does manage to enforce stricter tax measures on trusts in the future, these will not undo the benefits of structuring your life assurance in a trust, such as protecting assets and providing liquidity.

What about other valuable assets, such as paintings, furniture and jewellery?

As a result of the limited tax benefits associated with transferring assets to a trust, the focus has shifted to transferring assets that will outgrow any tax cost, as well as personal assets, such as investment paintings and antique furniture, as well as assets with sentimental value.

Phia van der Spuy is a registered Fiduciary Practitioner of South Africa and the founder of Trusteeze, which specialises in trust administration.

14/12/2017

STAYING POSITIVE: THE GRINCH HAS
NOT STOLEN CHRISTMAS

It may not be easy getting through the upcoming festive season and the year ahead, without a tinge of dread, given the local and global challenges we’ve experienced, but there is hope.

We asked Rocco Carr, business development manager and Francis Marais, research and investment analyst, both at Glacier by Sanlam, to take a step back, and observe some of the positives that we should be focusing on right now, as consumers and investors. The good news is clear: all is not lost.

Global outlook trumps local viewpoint

“Many people are currently quite negative about investments on the stock exchange, mainly because of the low returns of the last two to three years. For South Africans, the political situation is also an inhibitor and the economy is viewed through a prism of corruption and political discord”, says Carr.

He cautions against focusing on this negativity. “The reality is different. Political events in South Africa cause volatility in the short term, but in the long term they usually have less of an impact than the international economy would”. Carr suggests examining some global trends, in order to understand what is expected in the future:

1. Inflation pressure is slowly coming to the fore in countries where inflation was virtually zero. This indicates that consumer demand is picking up systematically.

2. In many areas interest rates are at a low and thus create an opportunity for economic recovery.

3. The figures for the gross domestic product (GDP) are starting to surprise on the upside in most economies, which indicates a faster acceleration in economic growth.

4. The cyclical recovery is taking place just about everywhere, with the US perhaps the slight exception where the situation has been improving since 2009. However, it is the first time that emerging and developed markets have started to recover simultaneously.

5. The GDP figures of the major powers, such as the US, Europe (East and West), China and Japan are all strong, and therefore are indicative of a simultaneous recovery in the global economy.

6. The Baltic Dry Index, which measures shipping of bulk commodities, has started to increase sharply, indicating increased transport of goods and therefore trade between countries.

7. The Chinese production figures, as well as exports, are constantly looking better than expected. This also indicates an increase in demand.

8. Although South Africa has distinct problems, our stock exchange's earnings are still more than 60% offshore, and any recovery in offshore markets is likely to have a positive influence on our market.

9. Economic growth in global markets usually leads to a greater demand for commodities and because we still have great exposure to commodities, it will have a direct effect on the local exchange.

10. Economic figures have reached the phase in the economic cycle where the exchange is continually surprised with better-than-expected figures. In such cases, the price-earnings-ratio (PE) of many stocks can decrease to more acceptable levels.

China is bustling

Marais concurs on the global outlook, and is adamant that we consider the ‘green shoots on the economic landscape’. This is helpful to reassure ourselves that there is hope for recovery. “The Chinese economy still is growing at between 6% and 7%”, he says. “This is positive for South Africa, as we are driven by commodities”. Locally, inflation is expected to decrease to between 4% and 6% during the next year. Interest rates should also decrease, and thus create relief for the consumer. “The sword of a further downgrade by Moody’s still may be hanging over South Africa, but the expectation is that this largely is priced into our market already,” Carr says. “Markets, in general, with fluctuation in between, should move upwards consistently over the next two years”.

Bye-bye recession

“The recession, officially, is over” says Marais. “Consumers may not feel it in their pockets as yet, but there is definitely an upturn in the economy”. As Carr does, Marais cautions against allowing what he calls ‘short-term noise’ – all of the economic and political distractions – to railroad personal investment objectives. “Investments are, by their nature, long-term. There will be ups and downs on the journey, and some downs may seem devastating, but they should not underpin the investor’s future outlook and goals”.

Decreasing cost of debt

The declining inflation rate bodes well for the interest rate stabilising, and is a positive for consumers incurring or managing debt. This also has a positive impact on the individual’s disposable income. A downer though is the oil price which is on the rise (another fuel price hike is on the cards early in December), which always has the negative knock-on effect on consumer spending.

South Africans are resilient
“South Africa has been in much darker places before. Everything happens in cycles, and the people of this country are profoundly resilient”, says Marais. “Civil society has found its collective voice again. What is emerging now truly is a mature, fully-fledged democracy. Also, let’s not forget that that our media largely continues to be free and fair.”

On the stock exchange front, he has noticed a recovery of equity market performances inflation to the same time last year. We have total return of the JSE All Share at 13.57% versus 5.81% at the same time last year (October 2016).

Marais reminds us that we have a very strong judiciary; our central bank is excellent; and our financial system is advanced and comparable to any in the developed world. His Top 5 Tips to Keep Positive, could help us through the festive season and well into 2018:

1. Do not deviate from your investment plan. If you have a willingness to invest, stick to the long-term financial plan that you have created with your financial planner. The big positive is that your plan will most likely outlast the present political administration.

2. Keep your annual financial check-up with your financial planner. It really is as important as your annual full physical. It will help you find financial direction.

3. Only you live your life, and only you know what it costs to live it. Take careful stock of your lifestyle and circumstances and plan accordingly. Be honest and realistic.

4. Revisit your budget. Life happens and your circumstances change sometimes without you realising it.

5. The 2017 festive season requires financial discipline more than ever before. This is the time to depart from the rampant consumerism of the past, and return to the opportunity for spiritual and familial connection that the holidays afford. It is possible to have fun on a strict budget, surrounded by friends and family. But it takes creativity and sacrifice.

This year, let’s focus on spending time – not money that may be in limited supply – on the people who are dear to us.

14/12/2017

STEINHOFF UPDATE

Background (excerpt from Coronation)

Steinhoff International announced an investigation into accounting irregularities which prevented the company from releasing their 2017 results on the scheduled date. At the same time it was also announced that the CEO, Markus Jooste, had resigned with immediate effect. The Chairman, Dr. Christo Wiese and Pieter Erasmus, the previous CEO of Pepkor, have taken interim responsibility for managing the group. At this stage there is limited publicly available information for us to ascertain the extent of the irregularities.

Steinhoff exposure (excerpt from PPS)

Following an announcement by Steinhoff on an investigation into accounting irregularities and the subsequent resignation of its CEO, the share price at the time of writing had fallen more than 80%. Alongside this, Moody’s downgraded its debt four notches to B1 and placed the retailer’s rating on review for a further downgrade. There remains a lot of unanswered questions, such as the nature and amount of financial irregularities, whether fraud has been perpetrated and the role of external auditors in picking up these irregularities.

Background (excerpt from Allan Gray)

“Our exposure to the share is reasonably limited. As at 5 December, we had c. 0.21% in the Allan Gray Global Balanced mandate. There has clearly been an adverse market reaction with the share having declined by approximately 80% in December to date. The risk and uncertainty remains high, however, until the investigation is concluded. The changes at senior management level and the independent investigation by PWC indicate the severity of the underlying issue and there is not an insignificant chance that the value of SNH’s liabilities (including those currently unknown e.g. future penalties and accruals) exceed the value of SNH’s assets (of which the validity and recoverability of up to EUR6bn are subject to investigation). A key part of our investment process is ensuring we assist our clients, as stewards of their capital, to act as responsible owners. We take this responsibility seriously, and while we are not material shareholders of SNH, we will employ our best efforts to ensure that management holds the relevant parties accountable, moves to timeously resolve the uncertainty, and ultimately acts in the long-term best interests of shareholders. The situation at present is highly fluid, and more information is likely to unfold over the coming days and weeks. We will be monitoring the company closely for further developments and will take action accordingly.”

Background (excerpt from Prudential)

“Prudential has maintained a high-profile negative view on Steinhoff over many years. Our key concerns related to its weak balance sheet, poor quality earnings that did not translate to cashflow, an extraordinarily low tax rate and a highly acquisitive strategy funded by the prolific supply of low cost debt and equity funding. In November 2014, Steinhoff announced the acquisition of Pepkor. The combination of a bolstered balance sheet as a result of the issue of shares to partly fund this acquisition, and the cash-generative nature of Pepkor's operations diminished the contribution of the above issues to the overall Steinhoff group. This led us to adopt a marginally less negative view on the stock. From a zero holding, we therefore accumulated a relatively small position in Steinhoff International whilst retaining a significant underweight exposure to the relevant indices/benchmarks against which we manage our clients' portfolios. This remained the case up to the shocking announcement on Tuesday evening (5 December) regarding accounting irregularities, the suspension of the release of Steinhoff financials and the resignation of CEO Markus Jooste. While there are still a number of unknowns, we believe the announcement on 5 December has profoundly negative implications for the future of Steinhoff as a going concern. We therefore sold all Steinhoff shares across all client portfolios on the morning of 6 December 2017. At the same time, Prudential client funds have never held any exposure to Steinhoff preference shares or debt; and also have no exposure to any Credit Linked Notes with underlying Steinhoff exposure. Whilst the decision that we took to exit our Steinhoff position at less than our average purchase price detracted from performance, we would like to highlight that our overall returns delivered for clients this year remain exceptional.”

Investors’ exposure to Steinhoff (excerpt from Glacier)

It will be difficult to ascertain each investor’s exact exposure to Steinhoff on an individual basis, especially if their exposure level is not part of the top 10 holdings of the respective funds. We trust that the respective asset managers will include a note in the upcoming quarterly commentary on their fund fact sheets with respect to their Steinhoff holdings and their impact on the respective funds, and proactively keep clients informed through ongoing direct information.

Investors are urged not to panic

The impacted fund managers on the Glacier platform are acutely aware of the impact and anxiety Steinhoff’s price movements are causing clients. Many have assured us that their investment teams are giving this their full attention.
We urge investors to view these movements in the context of the longer-term performance and to note that the impact is limited to a single share within a diversified portfolio of investments.
Glacier believes that the asset managers on our platform will do everything in their power to mitigate their clients’ risk, and protect their clients’ investments. All information related to Steinhoff has not yet come to light, and the story continues to unfold.
We therefore urge investors not to make any hasty decisions and trust the guidance of their financial intermediaries, together with their fund managers.

14/12/2017

Hiermee ’n besonderse woord van vir u bywoning van AfriSake se konferensie: “Die Blockchain-Revolusie: Wat Bitcoin en sy tegnologie vir jou beteken.” op 22 November 2017.

Ons het deur die loop van die dag opgemerk dat sekere Bitcoin-myngroepe promosiemateriaal by die konferensie versprei. Ons wil graag op rekord stel dat dit sonder AfriSake se toestemming was en dat AfriSake nie aanbevelings vir beleggings of spekulasie doen nie.

Neem asb. kennis dat die hoogtepunte van die dag binnekort op ons sosiale media platforms gedeel sal word waarna die onderskeie voorleggings deur ons bekwame sprekers vrygestel sal word.

Kyk en deel gerus ook ons webinaar genaamd: “Die Blockchain vir beginners.” waar Dawie Roodt, Andries Brink en Chris Becker met ons uitvoerende hoof Piet le Roux gesels oor verskillende aspekte van dieBlockchain.

Episode 1: https://www.youtube.com/watch?v=EL7e16v96rw
Episode 2: https://www.youtube.com/watch?v=xxCg9SzHEcw
Episode 3: https://www.youtube.com/watch?v=nkn_67WBzJI
Episode 4: https://www.youtube.com/watch?v=x7GJNXG2ED0

17/11/2017

Learn how to evaluate investments, assess risk, calculate a rate of return, and identify good professional and personal investment opportunities—no finance background required.