Email your queries to [email protected] or fax them to 021 488 4119. This feature is sponsored by Old Mutual Wealth.
SHOULD I WIND UP A TRUST?
I am the sole trustee and a beneficiary, with my children, of my late husband’s will trust. The trust was set up 30 years ago to protect his estate from estate duty and was then valued at R1.5 million. The assets (two modest properties) are now worth much more than that, but would be subject to capital gains tax (CGT) and other costs if the assets were sold.
Meanwhile, the trust is expensive to administer despite the fact that there is very little activity in the trust – the properties are rented out and rental income is received, expenses are paid out, and funds are distributed occasionally to the beneficiaries to help them finance their studies.
I have been advised that I could wind up the trust, pay the CGT and other costs now, rather than later, and then have freedom to invest the assets any way we wish, for the benefit of the children. I can’t see South African residential property or rentals increasing in value greatly while our economy is struggling.
I would be grateful for another opinion.
Ashraff Khan, a fiduciary specialist at Old Mutual Wealth Trust Company, responds:
Where a will trust makes provision for the termination of a trust , the trust needs to be terminated in accordance with those provisions. Where a will trust does not make provision for its termination, and the beneficiaries of the trust are being prejudiced by its existence, the parties may approach the courts for relief.
When considering the costs and benefits or otherwise of the termination of the trust, and the transfer of the assets, each of the parties to the trust needs to be consulted to determine the impact on each of them.
The reader is advised to consult a fiduciary specialist in her region. The questions asked are complex and may be approached in various ways.
Without a review of all the information and documentation pertaining to this matter and a detailed consultation with all of the parties, we cannot advise further.
IS BREXIT A CAUSE FOR CONCERN?
Do South African investors have cause to be concerned about Brexit? I have read contradictory reports about what this event will mean over the long term for investors. I don’t pretend to understand how my investments will be affected if the United Kingdom stays or leaves the European Union, but some “experts” seem to think we’re heading for a rough time. If that is the case, what should investors do – allocate to cash, gold or property?
Henry van Deventer, a wealth strategist at Old Mutual Wealth, responds: The reaction to Brexit serves to highlight one of the most dangerous investment traps: distractive risk. As investors, it is easy for us to be distracted by what is immediately in front of us and to allow this to influence our investment decisions.
Before we, as investors, react to Brexit, we need to think about what it means and which reaction would make the most sense. When making investment decisions, we need to distinguish between thinking fast and thinking slow. Thinking fast refers to our gut and reflex reactions, which almost never serve us well when making long-term investment decisions. Thinking slow speaks to making more considered, thought-through decisions. The results of these two approaches are usually very different.
Let’s apply some fast and slow thinking to Brexit.
The fast-thinking argument is that the UK is out of the EU, the balance has shifted in the European economy, the economic dynamics of the UK have changed, and we need to respond to the impact on the South African and global economies. Thinking slow paints a different picture. The UK has not given any notification that it will leave the EU. The EU can do nothing to force the UK to leave; this decision is entirely up to the UK. The outcome of the referendum is not binding on the UK government, which is in favour of remaining in the EU.
It is possible that the UK will not notify the EU that it intends to leave, or it will opt for a “soft exit” in terms of which it will retain certain rights and obligations vis-a-vis the EU. The strong “remain” vote in Scotland and Northern Ireland may further bolster a process that results in the UK not withdrawing from the EU altogether.
Thinking slow about Brexit highlights a few important things. We don’t know what will happen as a result of the referendum. It is likely to be some time before the outcome becomes clear, and it may not be as severe as some fear. The UK may not leave the EU at all.
Investing successfully over the long term requires us to understand what is likely to happen in the long term, to take into account how that will influence our ability to reach our investment goals, and, where necessary, to make subtle changes to our portfolio to ensure we stay on track.
Brexit has given rise to panic and created enough of a distraction to tempt us into making long-term decisions driven by short-term uncertainties. This is usually a very bad idea.
The fact that most markets have recovered since the result of the referendum was announced shows that sanity is starting to prevail. Until the ultimate outcome and impact of Brexit are clear, it’s best to keep our eyes on the horizon and refrain from making drastic investment decisions.
TAX ON PENSION FUND SURPLUS
I was recently contacted by a tracing agency contracted by a preservation fund that is apparently holding unclaimed benefits arising from a surplus in a fund to which I belonged. How do I verify whether the agency is legitimate before I hand over my personal details, and what are the tax implications of taking the money as cash?
Rory Shea, a financial planner at Old Mutual Private Wealth Management, responds: To check whether the tracing agency is legitimate, you should contact your former employer, which will be able to tell you the name of the fund’s administrator. Next, you should contact the fund’s principal officer or benefits administrator to determine if there is a legitimate claim. The fund’s administrator will be able to verify whether you are entitled to a share of a surplus, and if it has appointed a tracing agent to contact you. You could also contact the Financial Services Board (FSB) to verify the tracing agency’s details. The FSB, however, does not regulate tracing agencies
Whether the benefit will be taxed depends on the rules of the fund. Therefore, it would be useful to obtain a copy of the rules. You should ask the fund or tracing agency about the exact nature of the benefit, because that will determine how it will be taxed.
The Income Tax Act provides that a lump-sum surplus benefit will not be included in a beneficiary’s gross income for tax purposes, because it was received after the beneficiary left the fund to which he belonged.
The surplus benefit will be taxed according to the retirement fund lump-sum withdrawal table if the beneficiary takes the benefit as cash before reaching his or her normal retirement age. The tax is cumulative, so it will take into account any previous withdrawals.
WHY DID FUNDS’ RETURNS DOUBLE?
We recently noticed that the returns from the Old Mutual Income Fund and the Old Mutual Enhanced Income Fund seemed too good to be true. The normal quarterly returns for the Income Fund were about R5 800, while those for the Enhanced Income Fund were about R2 900. In March, the returns jumped to R11 500 and R5 300 respectively for the same amounts invested in each case. We have a number of income funds with other institutions and these have not suddenly doubled their returns.
Ken and Helen Wynne-Dyke
Arnold Singh, a financial planner at Old Mutual Private Wealth Management, responds: The spike in the returns of both funds was due to a positive revaluation of African Bank. The income from this holding was not distributed after it was placed under curatorship in August 2014. This income has now been received and distributed. The funds’ performance normalised after that – the returns for April and May were in line with those for previous periods. This spike will prop up the rolling returns of the funds.
Note: Letter writers will be sent the unabridged response, but published letters and responses will be edited.
Old Mutual Wealth provides integrated wealth planning and goal-based planning through financial planners, backed by global expertise and research. In order to create Old Mutual Wealth, Old Mutual has consolidated the expertise and resources of several established businesses: Acsis, Fairbairn Capital, SYmmETRY Multi-Manager, Old Mutual Unit Trusts, Old Mutual International, Celestis, as well as some investment consulting resources from Old Mutual Actuaries and Consultants. Strengthening Old Mutual Wealth’s position is the recent acquisition of Fairheads Trust Company.