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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

Dissecting the expansion of online checkouts

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By

Daniel Kornitzer, Chief Business Development Officer

 

Card payments have long existed as the preferred payment method for online consumers. But in recent years we have begun to see a rise in the use of alternative payment methods. Although card payments continue to serve the majority, it is becoming increasingly clear that consumer preference is diverging rather than reaching a consensus. Across the globe local preferences have developed as eCommerce has grown, and across the global digital payments landscape card payments are being passed over for new ways to pay.

Alternative payment methods are on the rise as they address several of the hurdles which have prevented cards from achieving total rule over consumer preference for online payments. Here are four key reasons for this:

  1. Alternative methods offer a superior consumer experience, particularly when it comes to mCommerce. With the rise of new regulations such as Strong Customer Authentication and developments in Open Banking, alternative payment methods can be faster and easier to use for consumers.
  2. New payments methods such as crypto are growing in popularity thanks to a more attractive offering to consumers such as lower cross border payment fees.
  3. With the digitalisation of services forcing many customers to pay online for the first time and many experienced online shoppers looking for more secure ways to pay, the security of financial data is a major concern. Alternative payment methods can protect customer details by removing the need to share bank details at the checkout.
  4. Not all consumers have bank accounts or a debit card. By offering alternative payment methods businesses are enabling these customers to join the digital economy.

Daniel Kornitzer

Businesses have been watching these trends closely and are constantly looking to improve their checkout experience for consumers accordingly.

 

The impact of COVID-19 on online payments

The need for businesses to expand their online checkout to meet changing consumer expectations is not a new trend. However, it has certainly been accelerated by COVID-19. The majority of businesses agree the pandemic has shifted consumer payment preferences, with alternative payment methods gaining in popularity.

Research shows businesses have seen more alternative methods chosen at their online checkouts with a greater percentage of consumers choosing digital wallets (57%), mobile wallets (39%) and eCash (28%). This has caused businesses to reconsider the way they understand payments, looking beyond traditionally methods to newer consumer friendly alternatives. With this is mind, reports suggest more than 60% of businesses are now making improving their checkout a top priority to fulfil the new high standard of consumer expectations.

 

Businesses are actively expanding their online checkouts

If we compare data from 2020 to 2021 on the payment methods offered or planned to be offered by businesses in the next one to two years, the trend is clear.

The number of businesses not offering or not intending to offer alternative payment methods is falling, as more and more start to recognise the importance of offering choice at the checkout. In the last year alone the increase in the adoption of alternative payment methods has risen dramatically, particularly crypto and eCash. As businesses begin to understand the urgency of upgrading the checkout experience, it is clear that alternative payment methods will play a key role in making this a reality.

 

Establishing crypto as a key player

One of the most interesting areas of payments which businesses should be watching is crypto. Research shows businesses are already backing this trend with almost half considering adding crypto as an alternative payment method as an immediate priority, believing it will help them reach new markets, and more than 50% already have confidence in crypto as the future of payments.

 

Diversifying the checkout as a form of defence

As well as offering a better customer experience and reaching new markets, businesses are expanding their checkouts with alternative payment methods to combat other familiar problems.

Most businesses see their current levels of cart abandonment as an issue, with research showing almost half have experienced an increase in levels of abandonment at the checkout in 2021.  Businesses consider two of the most significant causes of this to be card declines and absence of the customers’ preferred payment method. Offering alternative payment methods is an effective way of tackling these problems at the checkout.

The rise of fraudulent transactions is also becoming a more pressing concern for businesses, with the number of fraudulent transactions increasing since the start of the pandemic. Diversifying the checkout with alternative payment methods can be used as a valuable strategy to lower fraudulent transactions.

 

Looking to the year ahead

2022 looks set to be another year where we will see businesses continue to adopt new payment methods at their online checkout in a bid to keep up with consumer expectations.

By working with a leading payments partner, businesses can benefit from access to a range of payment methods through a single API integration, allowing ambitious plans to become a reality in the year ahead.

All data from this article is taken from our recent research report Lost in Transaction: Finding competitive advantage at the checkout.

 

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Business

How bug bounty programs can help financial institutions be more secure

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By

Rodolphe Harand, Managing Director at YesWeHack

 

Financial services have been one of the most heavily targeted industries by cybercriminals for several years. One alarming stat from the Boston Consulting Group found these firms to be 300x as likely as other companies to be targeted by cyberattacks.

Furthermore, the pandemic has led to a significant increase in the number of cyberattacks targeting financial institutions (FIs), with around 74% experiencing a spike in threats linked to COVID-19.

With FIs holding some of the largest collections of sensitive and private data, it’s clear they will remain an attractive target for malicious actors, especially as any data stolen can be used for fraudulent activities. This leads to the reputational damage of the financial entity that was compromised and has a knock-on effect in terms of monetary and reputational damage to affected customers.

For CISOs at FIs, the conundrum faced is how do you protect intellectual and customer data, and ensure accountability and transparency for clients and stakeholders, at a time when the pandemic has created budget constraints. Research from BAE Systems found that last year alone, IT security, cybercrime as well as fraud and risk departments had their budgets cut by a third.

Below we look at how bug bounty programs can help to address these pressing issues.

 

Protecting valuable data

Protecting customer and intellectual data has always been a top priority for FIs. However, as opportunistic cybercriminals have a lot to gain by stealing this valuable data, there is a constant evolution of threats, which means FIs must stay on their toes. By deploying a bug bounty program, FIs can work with ethical hackers that have a wealth of experience and unique skills when it comes to identifying security weaknesses within a FI’s defence, thus helping to implement effective security measures to help prevent data breaches.

Building trust among various stakeholders such as customers, suppliers and investors is critical for achieving business goals. By deploying a bug bounty program, FIs send out a message that they care about protecting the security of the data of those they work with – which in turn can have a cascading effect resulting in better business performance.

 

Improving accountability  

For FIs to win customers and keep them happy, amidst the growing threat of neo banks and customer-centric fintech organisations, speed of innovation is crucial. As such, many FIs have adopted an agile approach to build, test, and release software faster to bring online and mobile banking solutions to market quicker. However, this can create frictions between development and security teams. Security mandates are deemed to be unnecessarily intrusive and a cause of delayed application development and deployment.

Yet, with DevOps teams needing to build and deploy applications faster than ever before, an epidemic of insecure applications has emerged. According to Osterman Research, 81% of developers admit to knowingly releasing vulnerable applications, while research from WhiteSource found 73% of developers are forced to cut corners and sacrifice security over speed.

With developers often not having the time, tools, skills, or motivation to write impeccably secure code, there is an evident need to provide developers with more support when it comes to building applications securely Fortunately, bug bounty programs can provide a “fact-based” financial implication of inherent security flaws within the process. This makes it possible to hold development teams and service providers accountable for creating or delivering insecure products, thus addressing inherent security gaps within the business units and helping to drive continuous improvement.

Moreover, security awareness and education of developments teams can be improved significantly for those developers that are directly involved with the management of vulnerability reports for their bug bounty programs. This is because, the mere fact of exchanging information with ethical hackers, or assimilating the thinking of a potential hacker and having proof of concepts of vulnerability exploitation on their application components, naturally accelerates consideration of security early in the development stage and provides ongoing learning.

 

Get more return on your investment

According to Gartner, 30% of CISOs effectiveness will be directly measured on their ability to create value for the business. When security budgets are challenged, CISOs need to demonstrate business value through initiatives designed to enhance efficiency whilst stretching the dollar.

This is where bug bounties can help tremendously. Compared to conventional penetration testing, bug bounty offers a fast, complete, and measurable return on your security investment, with businesses only paying out for successful discovery of vulnerabilities. Equally, businesses get access to hundreds of ethical hackers that can test their programs, each with their own unique skillsets as opposed to only one skilled researcher testing the network. This results-driven model ensures you pay for the vulnerabilities that pose a threat to your organisation and not for the time or effort it took to find them.

Bug bounty programs also deliver rapid vulnerability discovery across multiple attack surfaces. With this approach, organisations receive prioritised vulnerabilities and real-time remediation advice throughout the process to accelerate the discovery of, and solution to vulnerabilities.

Another appeal of bug bounties is that due to the continuous nature of testing, more vulnerabilities are found over time as opposed to pen-testing. This is key to financial institutions that require agility to keep up with the continuous roll-out and updates of applications.

 

The cornerstone to a successful security programme

The risk posed to financial institutions by cyber threats will only continue, as evidenced by the number of data breaches seen in recent times. The COVID-19 pandemic has only exacerbated these risks, especially with almost all FIs having needed to shift to a remote working environment – which has only widened the attack landscape.

For FIs, a bug bounty program should be considered a fundamental cornerstone of any security strategy, with it being a modern-day cybersecurity solution that is well-equipped to tackle the immediate security challenges they face. In doing so, FIs will not only prove to customers and stakeholders their commitment to data protection and security but this will also be help them to avoid the monetary damages that could be imposed by regulators if a breach was to take place.

 

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