Trusts and wills should have a seat at the middle market table
There are two myths that you must dispel when advising your middle market clients on their holistic estate and financial planning needs. The first, which is taken as gospel by an alarming number of South African households, is that people must be asset rich before bothering with a Will … because nothing could be further from the truth. And the second is that trusts, which you know and understand as a valuable estate planning mechanism, are strictly the reserve of the wealthy.
Still a vital tool for estate planning
It took Nici Macdonald, Head: Certification and Standards at the Financial Planning Institute of South Africa (FPI) less than five minutes to address these myths during her presentation to the 2022 FAnews Estate Planning and Trusts webinar. The webinar focused on trusts and umbrella trusts as estate planning tools relevant to the middle market. From the outset, the presenters conceded that trusts had come under fire following the South African Revenue Services’ (SARS) clampdown on tax avoidance practices and courts raising the bar insofar as the duties and liabilities attaching to trustees. However, trusts still have a place in estate and financial planning. “If you focus on the core purpose of a trust, and you use it on that basis, there is a place for trusts in the middle market,” Macdonald said.
Failures among low- and mid-income families to tackle the basics around estate planning could have a proportionally larger impact on those families compared to wealthier families. “As financial advisers and planners, we need to tell our clients that estate planning is not only for the wealthy,” she said, before singling out a valid Will as an important starting point. The Will not only governs the distribution of the deceased’s assets, but also contains important final instructions re the guardianship of surviving children and other last wishes. In fact, having a properly drafted and executable Will, and appointing a professional executor, should be non-negotiable to ensure an estate is administered as intended, to the benefit of the intended beneficiaries.
Poor families at higher risk of poor outcomes
“If your client passes away without having structured an estate plan, without having drafted a proper Will, this will definitely impact on whether the intended beneficiaries can or cannot claim from the estate,” said Macdonald, before singling out those married out of community of property and members of so-called blended or non-nuclear families as being at high risk. From a financial planning perspective, the solution is simple. Step one is to draw up a basic estate plan. Step two involves the last Will and testament, properly drafted and executable. And step three is to ensure that your clients life policies and retirement solutions are accommodated in their estate plan, including that the pay-outs are made to the appropriate beneficiaries.
Finally, a fourth ‘situation-dependent’ option is to consider a trust. “A trust is still among the best solutions to protect beneficiaries,” said Macdonald, before rattling off a long list of pros and cons. The ‘cons’ include that trusts can be costly to create and maintain and the growing hesitancy among potential trustees to accept the responsibilities that go with their appointment. On the ‘pros’ side, provided you use the trust for its protection benefits, and you structure it correctly, it remains the best vehicle to ensure that your client’s wishes are fulfilled, and his or her loved ones are looked after. And some closing advice: “As long as the vision for / objective of the trust is to protect assets and ensure the future growth of those assets to create wealth transfer to the next generation, you have nothing to fear from SARS”.
Knocking two ‘pain points’ out of the park
“If you are looking for a vehicle to protect your clients assets on behalf of another, then there is really no better place than a trust,” agreed David Hurford, CEO at Fairheads Benefit Services, before proposing umbrella trusts as a viable alternative for the middle market. This market consists of families with small estates totalling ZAR1.5 to ZAR2 million, and with relatively simple needs. The umbrella trust structure addresses two of the pain points identified during the webinar, namely cost and the difficulty in securing trustees. “Who would want to be a trustee in this day and age,” Hurford mused. Trustees face significant liability in their personal capacity, and it can be difficult to manage and maintain a trust and make the necessary investment decisions under ongoing pressure from the beneficiary’s family members.
According to Hurford, umbrella trusts have had a rocky history. They were established in the late 1980s primarily to manage death benefits that flowed from the retirement fund industry, and more specifically to allow for the managed disbursement of monies to minor and other vulnerable beneficiaries. The Fidentia scandal, which rocked the industry in the early 2000s, led to regulatory intervention and the establishment of beneficiary funds, which is type of pension fund vehicle governed under the Pension Fund Act (PFA). Beneficiary funds were highly regulated with the result umbrella trusts ‘took a bit of a backseat’ around that time; but they are making a comeback. “We have realised that umbrella trusts still have an important part to play, particularly for those who have non-retirement fund money that needs to be looked after on behalf of minor beneficiaries,” Hurford said.
Cost-effective, flexible solutions
The main reason for their growing popularity is that umbrella trusts can hold funds from a range of sources, whereas beneficiary funds can only manage proceeds from retirement funds. “The idea behind the umbrella trust is to provide a cost-effective solution which does not require a high level of tailoring or that a new trust deed be registered for each beneficiary,” said Hurford. “Each beneficiary can have their own ring-fenced account with the underlying investments done at an individual beneficiary level, and the possibility for immediate settlement”. The success of an umbrella trust stems from creating scale by sharing trust-related costs among many beneficiaries.
There are some constraints, the most notable being that that umbrella trusts can only receive and administer liquid assets. “If there is a property involved, that simply cannot be held in an umbrella trust environment; and the tailoring for specific needs can be limited,” Hurford noted, before adding that the trust deed had to be drawn up to allow some flexibility in addition to accommodating a standardised set of needs. The final point raised during the estate planning and trusts discussion was the cost of financial advice and the perception among low- and mid-income families that they cannot afford it.
Tackling the accessibility, cost of financial advice
Macdonald commented that there were more than 33 000 licensed financial advisers operating in the country, making it possible for those who wanted advice to find it. The challenge to financial advisers and planners is to investigate the exciting prospects on offer in the estate planning discipline, perhaps in partnership with an expert estate planning practice. An important consideration is that estate planning opens up avenues for a range of need-appropriate financial products, most notably those aimed at providing liquidity in a household during the time it takes for an estate to be wound up.
If you decide to go the trust or umbrella trust route, then you should consider the accessibility, experience, knowledge, servicing model and track record of your potential partners. “The trust company deals with the beneficiaries and the day-to-day requirements that they may have in relation to accessing funds from the trust, so it is really important that you choose somebody with a good track record,” concluded Hurford. “Independence and transparency are non-negotiable, and your preferred umbrella trust should have a board with independent trustees as well as the necessary compliance and governance structures in place”.
Writer’s thoughts:
The 2022 FAnews Estate Planning and Trusts webinar, sponsored by Fairheads, exposed some serious shortcomings in the protection of beneficiary’s assets, with lengthy delays at the Masters’ Office and the cost of establishing stand-alone trusts among the points debated. Have you ever considered an umbrella trust as a solution for your middle market clients, and what are your main concerns with trusts in the estate planning context? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
