NFB Proficio Newsletter Issue 72

NFB FINANCIAL UPDATE Issue 72 February 2014

FROM THE CEO’s DESK

T

he year is off to a strong start with markets having delivered further positive returns over the Xmas break and it is time to reflect on savvy decisions for the year ahead. I would like to wish our clients and friends well over the next year, from a financial, and even more importantly, from a broader personal perspective. Life is about more than simple investments and annuities.

These, if dealt with smartly, will deliver the goodies over time. It is of great importance that you pay attention to the detail of family and community life, and get satisfaction from being in the place you find yourself. South Africa is a country and a community that is unique in many ways. The kaleidoscope of peoples, cultures, languages and religions creates a place where wonderful diversity exists. However, alongside this diversity exists a sense of confusion and misunderstanding,

Mike Estment CFP®, BA CEO - NFB Financial Services Group

financial services group

often fanned by the political and economic noise typical of developing economies. I often think that we are a remarkable bunch, dealing with abnormal stresses in going about our normal day–to-day lives.

It is imperative therefore that we reflect on that which we love, and those medium and long-term goals, as beacons. Sharing these with relevant people, be they family members, business associates or advisors is therapeutic in itself. It also has a second important impact, this being a deeper understanding by these other people of your thinking.

This approach, in a community where historically “cowboys don't cry” and where it has been up to the breadwinner to sort out all matters financial, should be broadly adopted.

We really enjoy the inclusion of spouses, other family and partners in meetings and the broader process of assisting clients in managing their portfolios, tax issues and Estate Planning. This sometimes includes trustees, accountants and other lay advisors as trusted parts of the client's decision-making process.

After all, in most instances the caring for your family represents the major drive to busting a gut for a career before retirement. So why not help them better understand the portfolio, decision-making and necessary outcomes?

One of my favourite parts of doing what I do, is being allowed into a place, reserved for few, playing a catalytic role in de-misting our clients' perspectives and concerns. There is little as satisfying as being an integral part of problem solving, particularly in the somewhat confusing, always changing, investment management part of peoples lives. Adopting this approach where you allow others in and take their advice to heart is in itself liberating.

This represents a suggestion to those of our clients who have

growing or grown up kids, spouses with an interest or a need to get more knowledgeable. Something that has hit home to us, in the last ten years particularly (given that NFB is 30 years old next year!), is the increase in some of our senior clients, many of them long standing, becoming infirm or less capable to perform the decision making role. At this point it is too late to suddenly expect the spouse, most often the wife, to step into the breach, assume this responsibility and be expected to acquit themselves either effectively or with confidence. We'd like to believe that our IFA's enjoy relationships of trust with you, and under the guidance of NFB's directors, together with family and other role players, will assist in a smooth handover of this important responsibility.

I have had personal experience of just this. A few years back my father-in-law passed away unexpectedly and the trauma and emotion of this event was worsened by his rather old fashioned approach to being the person totally responsible for all matters financial.

The lesson learned allowed me to involve my wife way more, as well as the trustees of the family trust.

NFB in East London, Johannesburg, Cape Town, Stellenbosch and Port Elizabeth can provide more than just investment services and advice. We have qualified and willing support for matters including teaching younger family members about investments, the provision of advice and implementation of Wills, Trusts and Estate Planning strategy (and the regular updating of these), as well as an efficient Executorship service in East London and Johannesburg.

We would be delighted to engage in any of these support services with you and look forward to meeting your needs in the year and years ahead.

fortune favours the well advised

Revisiting your will as part of your holistic financial planning where usufructs are involved

I

t may seem rather morbid to start off a year filled with all sorts of wonderful prospects by suggesting that you re-look at your will as part of your overall financial planning, but as Reverend Ford reminded us in the sermon from Pollyanna, death often comes unexpectedly, so it is best to ensure that you are prepared in every possible way.

Wills that have been drafted years ago when things like marital power were still in existence, and the husband (in theory at least) made all the decisions regarding how the estate would devolve, may have totally unexpected consequences. I will sketch a hypothetical situation where changes in taxation laws have had a rather dramatic effect on beneficiaries and one which I hope you will be able to avoid should your will have such a clause. As you may well be aware, part of our offering to clients is that we are able to assist in the drafting of wills and acting as executors through one of our “sister” companies located in East London so

By Glen Wattrus B.Juris LL.B, PGDFP CFP® professional, Private Wealth Manager NFB East London

assistance is just around the corner.

The facts surrounding the usufruct in question will be as follows: A middle class husband and wife bought a home in the name of the husband only, even though they jointly contributed to the bond repayments over the ensuing years and were able to repay the loan in its entirety prior to their respective retirements. Unfortunately, the husband passed away soon after his retirement and in his will he left the house to his three children subject, of course, to his wife having the usufruct over the home until her death. The will had been held at a bank in the closest large centre where banks had offices to deal with estates. As such, the lack of personal contact with the beneficiaries

Image credit: 123RF Stock Photo

by the executors failed to bring to light the fact that the children were entitled to reject the will and allow the house to pass in full ownership to the mother. She had, after all, contributed in equal part to the bond payments and should thus have had as much right to the home as the deceased husband. However noble the husband's intentions may have been of ensuring that his children would one day have some small inheritance, the consequences were rather unfortunate.

Assume that the year of his death was 1997 and he, of course, had no way of knowing that the tentacles of revenue collection would extend to a new form of taxation in 2001, namely Capital Gains Tax (hereafter CGT). In the year 2000, the surviving spouse wished to relocate to another part of the country and the home was sold and a replacement bought in her new home town. Remember that the home was never registered in her name, but in the name of her three children. The replacement home would thus have been bought and owned in equal parts by those children and thus recorded on the title deed as such. CGT made its unwelcome appearance soon after, but no more thought was given to the situation as, in the children's minds, it was always really Mom's house. The replacement home was bought for R300 000 so for the purposes of CGT this would have been the amount to take into account for any calculations. Along the way, various improvements were made to the house although records of these expenses were never kept by her. By the time she was ready to move into an old age home, the house had appreciated in value to R1 500 000 due to the popularity of the area where it was located and, of course, those improvements mentioned earlier.

Now let us examine the consequences of that clause in the will. Because the children were now joint owners, the advent of CGT meant that they inadvertently had a secondary home on which no rebates are allowed as they are for a primary residence. Once the house was sold and the proceeds were used to buy the unit in the old age home, the children's tax liability for that tax year shot up significantly.

Remember that the current rebate amounts to a measly R30 000 per individual tax payer on the property in question and it is not a cumulative R30 000 per annum. Each child would thus have a gain of R400 000 after deducting the base cost of the home. The

documents to substantiate any improvements were not kept, thus no further deductions are allowed. Further calculations are as follows: Gain (per child) Rebate Balance subject to 1/3rd inclusion rate Taxable gain Tax payable at 40% marginal rate

R400 000 R 30 000 R370 000 R123 333 R 49 333

I have kept these figures to a realistic level to try paint a picture of how even seemingly normal transactions can have an impact on the beneficiaries. An additional tax obligation on an even higher than average income earner will be significant in this scenario. There is no way that even the most creative of accountants can assist the beneficiaries as the purchase and sale price are listed in documents that are submitted to SARS which further indicate the percentages in which the home is held so no fudging of figures are possible, should you as the poor beneficiary even begin to entertain that possibility when faced with that unwelcome additional tax obligation.

The purpose of this article is not to minimise the benefit that a usufruct may have in certain instances, but to warn against potential problems that may arise where the wills were drafted prior to CGT becoming a relevant consideration. There are certain instances, particularly where large share portfolios are held, to confer usufructs on the surviving spouse and where there is adequate liquidity to one day meet the potential tax burden so please be objective in your evaluation of your will in its entirety. If it has been a while since you updated your will and if it does have a clause conferring a usufruct on a surviving spouse, please ensure that an adequately trained professional updates the “offending” clause or better still, have the will re-drafted to avoid such a burden on the beneficiaries who may not be able to front the money when “Jan Taks” comes knocking. Alternatively, provision should be made for the availability of funds to assist the beneficiaries in meeting these unwelcome additional tax burdens. Forewarned is forearmed so I trust that this will prompt you to re-evaluate whether a usufruct is indeed a suitable mechanism for your particular situation.

Don't stick your head in the sand when it comes to

owning property Image credit: 123RF Stock Photo

By Mikayla Collins B.Com (Hons), ÂŽ PGDFP CFP professional, Private Wealth Manager - NFB East London

O

ne of the most common mistakes investors make is to put their money into an investment and “forget about it�. While a long term outlook is advantageous, the problem is that most people do not monitor their investments regularly, which means they have no idea what fees they are paying or how much better their investments could be doing. The result is often a percentage of performance lost here and there, which doesn't seem a serious problem, but in the long term can have a substantial effect.

In most cases, as soon as a person has spare income to invest, the first thing they consider is buying property. It seems the most straightforward way to invest and we have all heard many success stories that started this way. Most young people aspire to own their own home and this is the first proper investment that they make.

However, not many people stop to consider all of the consequences of owning property. As with any investment, all of the fees, related expenses and opportunity costs should be taken into account. But often all you hear is what it cost originally and what it sold for, which makes it seem very attractive indeed.

So what are some of the things we forget to consider?

1. Costs: The costs involved in buying and owning a residential property: transfer duty, conveyancing fees, bond registration costs and initiation fees, rates and taxes, levies, insurance, maintenance, letting agents fees if renting, estate agent's fees when selling, etc. These should all be considered before calculating the return you can reasonably expect from or have earned on property you own.

1. Diversification: Although property is often considered a less risky investment, to expose all your capital to only one asset is risky in itself. Investing not only in property or in one specific property, but in a number of different types of assets which may also include property stocks, can lower your risk substantially. This includes diversification in terms of the geographic area as well as the type of property - i.e. retail, industrial, commercial, residential, etc. In addition, you can benefit from exposure to other assets - general equity (shares), bonds and cash, both local and offshore.

2. Liquidity: Unit Trusts/shares can be sold and the cash paid out to you in about a week, as opposed to physical property which can take months.

3. You can benefit from a regular income when you need it as well as market-related capital growth. There is no cost to you in selling unit trusts whereas you would incur estate agent's fees in selling a physical property. The income from property stocks is more stable than rental income from residential property as leases are longer and across different types of property.

The above points are nothing new yet so many people choose to ignore them and go on believing that they are making fantastic profits when in fact that may not be the case. This isn't to say that one shouldn't invest in property, but in doing so, consider the following: =

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2. Time Horizon: because of all the costs involved, especially in buying and selling, one should only purchase with a long term view. The once-off costs will have less of an impact on returns when spread over a number of years.

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3. Liquidity: Sale of property takes time, sometimes months.

As an asset, physical property cannot be converted to cash immediately if the need arises.

Most people buy property without even considering other alternatives such as a unit trust investment or share portfolio (where one can also have exposure to property if desired) which have a number of advantages over property:

Are you buying the property for emotional reasons (you want to own your own home) or for the purpose of making an income or profit?

Have you taken into account ALL the extra costs, and have you considered alternatives that may produce more income and/or growth with less time, energy and cash invested?

How long do you see yourself owning the property?

If you already own property, are you evaluating the returns post all fees and costs and is it worth your while to continue holding the property or could your money be put to better use elsewhere?

Information is the ultimate tool - ask the questions and do the research, and you will reap the benefits in the long run.

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