Connect | Issue 2 | 2021

INDIVIDUAL CONSULTING

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Connect with Alexander Forbes for insights and tips to help you make better financial decisions.

ALEXANDER FORBES

In this issue Getting real about your finances with Rita Cool

Finance MythBusters

Are Trusts still relevant?

Market Updates

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Join our free webinar where we discuss Intergenerational Wealth: How to build wealth and retain it for your family on 22 September from 12:00 to 13:30 register here.

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Getting real about your finances with Rita Cool

Securing your financial well-being: How well do you know yourself?

Achieving success in any aspect of life begins with knowing yourself.

This is true whether you’re starting a relationship, choosing a career or working towards a financial goal. If you want to secure your financial well-being, you need to cultivate the behaviours that will help you do this. Here are some things to consider about yourself to help you achieve your financial goals…

How do you feel about money?

What are your strengths?

One of the best things you can do is to acknowledge your strengths. Consider your strengths as they relate to money.

SHARES, BONDS, DERIVATIVES, YIELD, CRYPTOCURRENCY. Do you ever see these terms and panic that you don’t know what they mean or how they might affect you?

Do you research well? Do you have good self-discipline?

Recognise your strong points, and find ways to apply them to your financial life. You’ll be able to accomplish more, and do it faster, if you can create a financial plan that plays to your strengths.

Did you know that your personality actually has a bigger effect on your finances than knowing what any of these terms mean in detail? It’s not necessarily the portfolio or how much you know that’ll make you financially successful, but how you deal your emotions when you make decisions.

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ALEXANDER FORBES

What are your weaknesses?

What and who has influenced you?

It’s always fun to acknowledge your strengths. Your weaknesses, on the other hand, not so much! But it needs to be done too.

Take a look at where you could use some work.

We all have different personalities, histories and circumstances, are of different generations and have different cultures. These factors affect the way we make decisions, how we see the world and how much the world affects us.

Are you sloppy when it comes to tracking your spending?

Do you have a hard time saving up for your goals? Instead of developing your talents or your mind, do you waste your downtime on Netflix or PlayStation games?

It is almost impossible to make a decision purely on the facts presented to you. By being aware of who you are and what has formed you as a person and what might affect your decisions, you can decide if you need to disregard those inputs or if those experiences will improve your decisions.

Take a look at some of your weak points. Create an action plan to change the way you do things so that your weaknesses gradually become strengths.

Get help when you need it

What are your triggers?

Understanding yourself and the way you interact with money is an important part of financial success. Once you know the underlying reasons for your actions, you will be more likely to fix your money problems and adopt practices that will help you secure your financial well-being.

Many of us have triggers that can lead to poor financial decisions. If you know that you spend money when you’re upset, it might be a good idea to stay away from the mall, or online shopping sites, when you’re feeling down.

If you feel flush on pay day, and have a burning desire to splash out on yourself, consider making an additional voluntary contribution (AVC) to your retirement savings every month instead. That way you’ll have less immediate income at your disposal. Think about what triggers your poor money decisions, and look for ways to avoid them.

And remember, you don’t have to go on this financial journey alone. A good financial adviser can help you – not only with translating financial terms into something more relatable, but also in terms of taking the emotions out of your financial decisions.

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Finance

MythBusters Throughout life you’ll probably come across a few financial ideas that you assume must be correct for you because everyone is doing it. Remember that you are an individual and what is good for someone else might not be good for you.

MYTH #1:

You have to save/invest, whenever and however you can.

Thato:

You are always told how important it is to save.

This is not a myth, however it is important to discern when and where you save. Before you invest, you need to save enough to reduce your debt.

Trevor:

Exactly! Don’t invest if you have a lot of expensive debt that’s costing you more in interest than the return you can get on an investment. Clearing your debt as soon as possible will prevent you from going into a debt spiral.

Thato:

Trevor:

Once your debts are under control, consider investing in your retirement funds, unit trusts or a Tax-free Savings Account. Remember, though, you’ll still need to put away some extra cash for unexpected emergencies!

You can also create an additional safety net for emergencies by clearing your credit card debt with every available Rand you have. Doing so will ensure that you have instant access to cash when you really need it.

Thato: Before starting with long-term savings, make sure you have a cash flow that balances every month. If your cash flow isn’t working, sort that out first. This will stop you from getting into deeper and deeper financial trouble.

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MYTH #2:

“You have to own a house” or “Property is always a great investment” Trevor:

Property is seen as a good investment because it gives you an asset that can increase in capital value and could also give rental income. It can be financed at a reasonable interest rate over a long term, which is classified as ‘good debt’ because you’ll have a large asset when the debt is paid off.

Thato:

Owning the house that you live in can be a fantastic investment, but it’s not the only way that you can have access to investing in the property market.

Thato:

Yeah, you always hope that the value of your property will increase over time and that you can sell the property for a profit. Unfortunately, this does not always happen. The area you live in could lose value over time, or you might over-capitalise on your investment with spruce-up jobs over the years.

Trevor:

And if you’re in a rush to sell at the wrong time in a property cycle, this could also result in you losing money on your investment.

Thato:

There’s also a big difference between buying a house for yourself to live in and buying additional properties to rent out for investment purposes.

Property rental comes with risks too.

You aren’t guaranteed to get a good tenant or any tenants at all.

Thato:

Trevor:

Your tenants might simply stop paying the rent, resulting in legal fees for you to have them evicted. They could also damage the property or fail to report leaking pipes, for example.

This will ultimately ending up costing you!

If you’ve already bought the house you live in, it might be easier to invest in property shares instead of physical property if you want to reduce some of the risk and effort of managing an additional property.

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CONNECT | ISSUE 2

Are Trusts

still relevant?

In recent years trusts have come under scrutiny because they have been used to avoid taxes and hide assets, especially at divorce. Although trusts might not be necessary for everyone, there are still good reasons to use a trust for your planning, and these reasons are often not financial.

Three types of trusts

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SPECIAL TRUST

TESTAMENTARY TRUST

INTER-VIVOS TRUST

This type of trust is set up for a beneficiary who has special needs (mental or physical), to help with their maintenance.

This type of trust comes into existence as a result of a clause in your will and would generally be used for funds left to a minor beneficiary.

It normally ends when the minor beneficiary reaches a specific age.

It’s worth noting that minors can’t inherit assets and assets bequeathed to minors that do not form part of a testamentary trust will automatically fall under the administration of the Government’s guardian’s fund.

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This type of trust is set up during the lifetime of the founder.

Assets in the trust are managed by trustees in line with the trust deed (the ‘rules’ governing the management of the trust’s assets).

It is very important to understand that when you divest your assets to a trust, there is a beneficial change of ownership.

The founder cannot treat the assets as their own – doing so could result in the trust being labelled a ‘sham trust’.

Trusts are expensive to maintain and manage: There are trustee fees, accounting fees and tax charges.

Although there are several reasons to consider using a trust when it comes to estate planning, the benefit of the trust should be looked at relative to the costs.

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Benefits of setting up a trust Protecting children from multiple marriages.

Assets can be ring fenced for specific people in a trust like the right of use to a property and an income from the trust.

Where beneficiaries are minors. Minors’ assets are protected in a trust and can be used to cover costs such as education, healthcare and housing. Payments to suppliers can be done directly to providers.

Protecting the assets of troubled beneficiaries.

Trusts can be set up for adult heirs who may not be able to manage their own funds as a result of gambling addictions or substance abuse. This will also protect the assets so that it can be used for the support of their spouse and children.

Setting up a new business venture.

When an individual starts a business, there is the risk that if the business fails, creditors could approach them for debts relating to the failed business. If the assets are held in a trust, this mitigates these risks.

Preserving intergenerational wealth – in other words, wealth that will last beyond two or more generations.

A trust allows the assets bequeathed to be managed in accordance with the founder’s wishes. Estate duty is also not continuously paid on the same assets when assets are left to a trust because the initial amount bequeathed, and any growth, will no longer form part of an estate. Death gives rise to a capital gains tax event and bequeathing assets to a trust allows trustees to manage capital gains tax as the trust does not ‘die’.

Preserving business growth. If you start a business and the shares are held by a trust, the growth in value of the business falls outside your estate.

Protecting family member with special needs.

A trust can be set up for the maintenance of that individual.

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Tax and Trusts

■ Either the loan can be repaid by selling trust assets, which will give rise to capital gains tax and neutralise the benefits of historic planning, or interest can continue to accrue. It is for the trustees and tax advisors to determine the right course of action for a trust.

■ Unlike tax for an individual, a trust has a flat rate of income tax of 45% on any income earned. Many individuals will pay tax at a much lower rate. In addition, a trust does not qualify for any deductions such as the interest abatement and capital gains tax abatement on a primary residence.

■ The inclusion rate of any capital gain earned by a trust is 80%. With the tax rate of 45%, the tax on any capital gain will be at a rate of 36% . This is high compared to a maximum rate of 18% in the hands of an individual taxpayer paying tax at a 45% marginal rate.

■ Income and capital gains can be attributed to the founder/s and sometimes to the beneficiaries, but this can become technical, so you should always get professional tax advice first.

■ Special trusts are taxed at the rates applicable to individuals, but are not entitled to any rebates.

Off Shore Trusts The same principles apply to off shore trusts, but there are some nuances that will need to be investigated.

RED FLAGS ■ If any beneficiary or founder/settlor of a trust moves to another country (for example, the USA), you should consider the beneficiary’s status on the trust before the move occurs. This can have serious tax implications which can prove extremely costly to the beneficiary.

■ Private residences and holiday homes owned by a trust. If a primary domestic residence is held in a trust, it does not qualify for the Capital Gains Exclusion when you sell the property. The purpose of holding a primary house in trust needs to be checked.

Section 7C deemed interest ■ Historically, assets were sold to a trust by way of an interest free loan account. No interest were paid by the trust for such a loan and this lead to certain tax avoidance structures. To correct this, SARS introduced Section 7C to the Income Tax Act so that there is now deemed interest on an interest free loan. The interest is calculated at a legislated rate. For example, on a R5 million loan where the interest rate is 7% , R350 000 (R5m x7%) has to be included in income and taxed at the donations tax rate of 20% (R70 000). This will be paid as long as the loan remains unpaid.

So, to Trust or not to Trust? That is the question.

Trusts have their place, but should only be used for the right reasons. Consult your financial planner and your tax consultant to find out if setting up a trust is a good idea in your personal circumstances. Very often, simpler is better and a well-crafted will should suffice.

By Peter Rigby, Wealth Manager at Alexander Forbes

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Market

Updates More than 5.11 billion Covid-19 vaccine shots have been administered globally

US could be ending ultra-low-rate policies in near future Coronavirus infections continue to rise driven by the Delta variant

SA’s producer price pressures begin to moderate

Key Highlights

R South Africa’s GDP is higher by 11% after Stats SA rebased methodology

Market and economic indicators JSE ALBI STeFi SA Property R/$ ( exchange on 31/08/2021) R/Euro (exchange rate on 31/8/2021_ R/Pound (exchange rate on 31/08/2021) Gold ($/oz)

SA third Covid-19 wave has not dropped as in previous waves The global economy moves towards too little growth

1 year 21.54% 14.84% 3.83% 51.02% 16.74% 17.98% 13.83% 23.23%

3 years 4.75% 9.97% 5.86% -7.34% 0.36% -0.11% -1.48% -2.50%

You can find a more in-depth view of how the markets have been performing here.

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5 years 5.04% 9.62% 6.50% -5.28% 0.30% -0.87% -0.63% 2.96%

Disclaimer: Please note that while care has been taken to ensure that the information provided in this article is correct, it represents an overview of the topic under discussion and as such does not constitute advice. While Alexander Forbes has taken reasonable effort to ensure that the information contained herein is true and correct it will not be held liable in respect of any loss arising from any advice provided arising out of the contents of this circular. We suggest that you contact your Legal department before taking any decisions based on the information herein.

The following businesses are licensed financial services providers: Alexander Forbes Financial Planning Consultants (Pty) Ltd (FSP 31753 and registration number 1995/012764/07) Alexander Forbes Investments Limited (FSP711 and registration number 1997/000595/06) Credits: Alexander Forbes Communications (production) | Getty Images (imagery) I7I

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