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WHY TRUSTS REMAIN RELEVANT FOR ESTATE PLANNING

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By Peter Rigby, private client wealth manager at Alexander Forbes Wealth

 

There is still good reason to use trusts in estate planning, often for reasons which are not purely financial.

When you divest your assets to a trust, you are changing ownership of the assets to the trust beneficiaries. The trustees must manage the assets in accordance with the trust deed, which forms the basis for governing the management of the trust’s assets. The trust founder (or settlor) may not treat the assets as their own.

Trusts are expensive to maintain and manage. There are trustee fees, accounting fees and tax charges. Consider the benefit of the trust relative to the costs.

South Africa has three basic kinds of trusts, each serving different purposes:

  • inter-vivos or living trusts
  • testamentary trusts
  • special trusts

 

Peter Rigby

Inter-vivos trusts

These trusts are set up during the founder’s lifetime. Trustees manage assets in the trust in line with the trust deed.

During your lifetime you can donate or sell assets to a trust using a loan account. If donated, the donor will pay donations tax of 20% of the value of assets transferred. If sold using a loan account, there will be a capital gains tax event and the loan will attract interest that will need to be included in the founder’s income. Setting up an inter-vivos trust and funding the trust by way of a loan or donation is therefore an expensive exercise as it involves a cost to the founder. Consider these costs relative to the benefits when deciding if a trust is the right decision.

Apart from the costs associated with setting up and maintaining a trust, you need to understand clearly that you are divesting your right to the ownership of the assets being divested of. The assets are no longer the property of the founder and can’t be still treated as such. Trustees manage assets held in trust. Although the original founder may be a beneficiary or trustee, they can no longer control how the trustees manage the assets.

 

There are several reasons to set up an inter-vivos trust:

  1. A second marriage with children from both sides

Using a trust ensures assets are managed in line with the founder’s wishes. Often a second spouse may receive the right of use to a property and an income from the trust as set out in the trust deed.

  1. Minor beneficiaries

Leaving your assets to a trust ensures that the capital is protected for the benefit of the beneficiaries to cover costs such as education, healthcare and housing.

  1. Starting a business

There is a risk that if the business fails, creditors could approach the individual for debts relating to the failed business venture. Holding the assets in a trust mitigates this risk. If you start a business and the shares are held by a trust, the growth in value of the business falls outside your estate.

  1. Protecting intergenerational wealth

This type of wealth will extend beyond two or more generations. A trust allows the assets bequeathed to be managed in accordance with the founder’s wishes. To ensure estate duty is not paid on the same assets, you bequeath them to a trust. The initial amount bequeathed, and any growth, will no longer form part of an estate. This circumvents assets attracting cascading estate duty. Death gives rise to a capital gains tax event, so bequeathing assets to a trust allows trustees to manage capital gains tax as the trust does not “die”.

  1. Adult heirs who can’t manage their own financial affairs

Trusts have been set up to receive the assets of adult heirs who cannot manage their own funds as a result of gambling addictions or substance abuse. More importantly, if the heir cannot manage their own funds responsibly, it is unlikely that funds they inherit will be used responsibly to support their spouse or children.

If any beneficiary or founder of a trust moves to another country, you should consider the beneficiaries’ status on the trust before the move occurs. This can have serious tax implications which can prove costly to the beneficiary.

 

Testamentary trusts

A testamentary trust comes into existence as a result of a clause in your will after your death. The main reason for a testamentary trust is for funds left to minors or a spouse. The will specifies the trustees of the trust and their powers. A testamentary trust usually ends when a minor reaches a specific age.

 

Special trusts

This is a trust set up for a beneficiary who is mentally or physically challenged and unable to provide for themselves financially. The trust ensures financial support for that individual.

 

Tax and trusts

A trust has a flat income tax rate of 45% – any income earned will be taxed at 45%. Many individuals will pay income 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. Special trusts are taxed on a sliding scale from 18% to 45%.

The capital gains rate of a trust is also high compared to that of an individual. The inclusion rate of any gain earned by a trust is 80%. This means you will pay an income tax rate of 45% and capital gains tax of 36% compared to an individual taxpayer paying income tax at a 45% marginal rate and a maximum rate of 18% for capital gains tax.

Income and capital gains can be attributed to the founder or the beneficiaries, but this can become technical and professional tax advice should be sought. This does, however, mitigate the higher taxes payable if the income or capital gains were to be taxed in the trust.

Trusts have their place when used for the right reasons. Consult your financial planner and trust expert to ascertain whether your reasons for forming a trust are sound.

 

Business

OUTSOURCING YOUR IT SOLUTIONS CAN SAVE YOU FROM COSTLY DOWNTIME

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Amir Hashmi, CEO and Founder of leading IT and Cloud services provider Zsah, discusses why you need full-time professionals if you want to avoid the money pits of IT downtime

 

A lot of wealthy business owners will uphold the following infamous statement – time is money. Many CEOs believe that it should be at the heart of your business strategy. They aren’t wrong, and it is no different when it comes to IT. Therefore, it is high-time that businesses consider the real risks and costs associated with IT downtime, and do all they can to avoid it

In the midst of a post-pandemic technological revolution, it’s now more important than ever to carefully consider who manages your technology. It is essentially the motor that drives productivity, efficiency and growth, and if therefore, if there isn’t a thorough and dedicated system in place, businesses risk system failure, which can risk everything.

Something so essential to a company deserves to be taken more seriously than just to deploy the services of an IT help desk when there’s a significant issue. The answer isn’t necessarily to consider ways in which you can fix a problem once it arises, but instead to ponder upon ways of preventing an issue from occurring in the first place. This is what leads us to managed IT support services: your personal, dedicated team of IT experts that not only fix issues when they occur, but that also constantly improve the software and hardware so there is less chance they ever take place.

 

The real cost of downtime

Whenever your IT isn’t functioning at its full capability, you are losing money. Even the shortest of gaps in service can severely impact the customers’ experience, your reputation, and the output and efficiency of your entire staff.

In 2017, ITIC sent out an independent survey to measure downtime costs. It found that 98% of organisations say that a single hour of downtime costs over USD $100,000, with 81% putting the figure at over $300,000. For 33% of businesses, 60 minutes of downtime would cost their firms between $1 million and £5 million.

Figures from Statista.com reveal 24% of organisations worldwide reporting average hourly downtime costs amounting to between USD 301,000 and USD 400,000, with 14% reporting greater than USD 5 million in costs.

Elsewhere, IHS Markit surveyed 400 companies and found downtime was costing them a collective USD 700 billion per year – 78% of which was from lost employee productivity during outages.

 

Managed IT solutions are the key

Though we may never know the full cost of downtime, it is evident that it costs individuals and businesses a large amount of money. Don’t wait until your next emergency to remedy a problem; get the professionals in now to prepare for the future, rather than just fix problems in the present.

When you work with a managed technology services provider, your network and infrastructure are supervised 24 hours a day, all year round. As with any IT service, this means that issues will be fixed – however the real advantage is more long-term. As technology service providers perform regular proactive upkeep, there will be a reduced chance of suffering from issues in the first instance, and when (or if) they do occur, it will be far simpler to recover data thanks to full cloud integration.

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Banking

HOW TRADITIONAL INSURERS CAN USE TECHNOLOGY TO IMPROVE THEIR RELATIONSHIP WITH CUSTOMERS

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The customer experience with insurance is anomalous, in that one is only required to engage with their insurer if things are going wrong for them. To add value to the relationship, new technology and methods should be adopted, in turn driving loyalty and business growth, writes Oliver Werneyer, CEO and Co-founder of Imburse

Oliver Werneyer

Insurance is one of the oldest industries in the world and it is still, to this day, considered a grudge purchase. Looking back, insurance has a history of having a challenging relationship with its customers. According to an IBM study, in 2008, only 39% of consumers trusted the insurance industry. This percentage has stayed largely similar over the years, having reached only 42% in 2020. For any business with growth ambitions, good customer relationships are crucial.

I believe that now more than ever, the insurance industry not only needs to continue investing in improving relationships with customers, but to really think about new ways of doing so. At a basic level, the moment of truth for an insurance customer is when either they need to pay or are getting paid. Insurers can have the best policy wording, quick claims processes, apps and advisors, but if the experience to pay premiums or to receive a claim is bad, the customer immediately loses trust.

The pandemic has exposed this tenuous relationship between insurers and its customers. The need to move everything online and provide personalised services has exposed significant shortcomings in the service insurers provide. The industry has been too slow to adopt newer technologies and move engagements closer to the customer (self-service and empowered). This is largely due to the legacy systems and processes that insurers failed to modernise over previous years.

This means that the better-positioned incumbents have stronger customer relationships and benefit disproportionately from the pandemic, as they are able to win more new customers and convert customers from other insurers. They also benefit from significantly lower customer acquisition costs and much better growth, as illustrated in this McKinsey report. Even new entrants or InsurTechs are benefitting massively by focusing on improved customer experience and customer relationships.

However, it is never too late for insurers to build better relationships with customers. The main way to build a good relationship with a client is to make life easier, live up to promises and add value through the relationship with them. By working on these key elements, insurers can start building strong relationships with their customers, and, through the right partners, deliver this in a timely and non-disruptive manner.

 

Embedded Services

Insurance products often get a bad reputation because they cost money, but the benefits might only come much later, or never. Customers don’t get to experience a positive relationship with insurance products, either because they never claim and feel like they lost out, or they claim and they’re in a bad situation. By either embedding other services into the insurance experience to deliver a more transactional engagement, or embedding insurance products into general customer experiences such as online shopping or rewards, insurers can enrich customer relationships to generate value.

This way, insurers become a value-adding part of the customers’ everyday activities and not just a product that they have to pay for and may never get anything back from. One example is to embed micro-savings capabilities, often found in banking, into pension savings and insurance products. This can allow customers to save more for pension, attract younger customers and build a portfolio of fiscally disciplined customers.

 

Tailored journeys and personalisation

Customers have come to expect personalised journeys and engagements from product providers. Streaming services, social media, e-commerce or mobility services have shaped the customer expectations. Now, customers are also expecting personalisation for insurers.

Insurers need to invest very heavily in delivering personalisation and customisation to customers as they engage with their products. Failure to deliver this puts renewed strain on the value perceived by the customer and their relationship with the insurer. This applies not only to customer interfaces, but to aspects such as payments. Insurers should make it easy and pleasant for customers to pay and get paid. As the main moment of truth, payment experiences need to work optimally.

 

Perceived customer value metrics and delivery

The value customers derive from insurance products is, generally, monetary. Therefore, insurers must invest in product enhancement to increase its perceived value. Perceived value is not tied to a monetary value. By being able to choose between multiple payment options, such as a $300 pay-out to a bank account or a $320 Amazon voucher, the customer has a higher perceived value of the payment. This can be achieved by leveraging non-insurance products that can be purchased at a discounted price, exclusive access that the customer would otherwise not have or conversion into a form that is more useful to the customer.

Payments, for collection and pay-out, are at the core of delivering this value. An excellent payment experience immediately influences the customer to be positively inclined toward a product (PwC report). In order to offer this, insurers need to leverage multiple technologies and providers, offer any speed of transaction in any market, and deliver faster automation and better risk control. The key is to transform insurance products into transactional value-adds to customers’ lives and use this opportunity to continuously build on relationships with customers.

The main roadblock for insurers is still the operational implications of these activities and the costs that arise. In looking to build a better customer relationship, insurers need to look at partners that are operational enablers to deliver this. Partners that can solve the integration and speed-to-market problem so that insurers are enabled to deliver new capabilities, not bombard them with new ideas and no path to delivery.

Imburse, for instance, enables insurers to access all the global payment providers and technologies available in any market. Through a single connection, insurers can deploy any payment capability into any channel, for collection and pay-outs, without ever again needing to build a direct operational integration to the providers. This gives them full freedom to leverage payments as a key value driver and customer experience enhancer.

Building a better relationship with insurance customers is key for the insurance industry to close the protection gap. Incumbents are in the prime position to look at Insurtech and Fintech partners to rapidly and significantly modernise, digitalise and transform their own capabilities to deliver major enhanced value to their customers.

Imburse is an advanced universal payment connector that enables businesses to gain cost-effective access to complete global payments technology, regardless of the service provider. To learn more, please visit www.imbursepayments.com.

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