An On-off Relationship of Trust

South Africans have had a love-hate relationship with Trusts for the longest time.  We love the protection it provides against the wrath of a spouse, the greed of SARS and the persecution of creditors.  But we hate the costs and admin associated with it, the loss of control and erosion of the tax benefits we enjoyed in the recent past.

Professionals differ in their approach to its uses and benefits; and to get contradicting professional opinions is the rule rather than the exception.  Accounting professionals point out the two-dimensional short-term tax expense of trusts, the financial advisory profession often point out the higher Capital Gains rate and FICA burden a trust creates, whilst estate planners sing the praises of the unique legal nature of a trust which can carry wealth across generations so seamlessly.

To compound the complexity, trusts are used across multiple jurisdictions and as ownership vehicles for assets situated in many countries.  Each country further taxes proceeds from trusts differently.

Each voice in these debates carries with it an element of truth, an element of half-truth and an element of exaggeration.  Somewhere in between is a bespoke truth relevant to the individual estate planning scenario.  Absolute viewpoints tend to be more wrong than right.

What we do know with certainty, is what trusts are and how trusts differ in principle.

What is a Trust?

A trust is an arrangement between a person who gives something to someone to own on behalf of a group of people or for a specific cause.  In South Africa we explain this transaction in contractual terms and our trusts are also of contractual nature or the product of a will.  We recognise a founder who donates or bequeaths something to trustees to hold on behalf of beneficiaries or a cause.  We use the law of contract and the law of testation, coupled with several unique principles to understand a trust.

Many offshore countries like Guernsey, Jersey, and Isle of Man (the so-called offshore jurisdictions) have a more pliable legal understanding of trusts.  For them for instance, a trust can just be declared to exist by a trustee.  In all these examples however, there is a relationship of trust where trustees care for beneficiaries with funds entrusted to them.

The main differences between South African and the typical “Offshore” can be tabulated as follows:

Whichever way one look at trusts, whether it is local trusts or offshore trusts, the benefits of trusts are directly related to the quality of the trustees, their knowledge of the law in which the trust operate, their administrative ability and competence, and above all, their trustworthiness and ethical standards.

Trusts function within a legal scale of grey (as opposed to the black and white environment of the accounting world), which makes it a complicated vehicle to use.  Bad things happen in trusts through ignorance of the law, or of the level of ethics and skills required by trustees.

It is advisable to obtain legal assistance to navigate the complexity of a trust to achieve the simplicity in estate planning that lies on the other side of it.

The Living Relay – Ensuring Generational Momentum

In looking back at photos of my life it quickly dawns on me that life is not a picture, it’s a movie. We get bigger, older, wiser, richer (or poorer!). We lose loved ones, and we gain friends. We have kids and grandkids, and our kids and grandkids lose parents and grandparents. This happens to everyone all over the world all the time. We live in constant momentum.

In the financial universe, there are two interesting sets of momentum. One is pretty obvious and in theory easy to manage; the other is less obvious and as a result, more difficult to get right.

Finding Financial Independence

The first is our own personal financial growth. Most people aspire to reach financial independence. That means having enough to enable us to work because we want to, not because we have to. To reach this point we undertake a journey of labour and savings illustrated by the graph below. The money we need to see us through our life at any given point in time is depicted by line A. The savings we have accumulated at any point in time to match that need is typically depicted by line B.

Becoming financially independent is determined by our aggregate spending throughout our life rather than our earnings. Both are needed, but it is the spending side that determines how hard we need to work and for how long. The higher our standard of living, the longer it takes to be financially independent and the more we need to reach that point. Wealth, therefore, is an entirely bespoke concept. The fact that we are living longer also means that we will have to either work for longer, work harder or spend less. Any of the three will do the trick, not much else.

This is pure maths and maths is not a guessing game. It just needs honest soul searching and a calculator.

Generational Momentum

The second is less obvious and concerns the interdependent nature of succeeding generations on each other. This is life’s relay. It’s a relay where the older generation runs towards the younger generation in a never-ending race. The baton refers to the assets each generation accumulates. Understanding the rules that govern this relay is crucial if one wants to hand over the baton successfully and maintain the momentum already generated. Here are the four simple rules:

Rule No. 1: It’s a Relay

The participants must understand they are in a relay. This means a high degree of communication and mutual acceptance that at some point in time the baton will pass on. This is especially important for family businesses – the sooner one addresses succession the better.

Rule no 2: let go and take

The giver must be willing to let go, and the receiver must be willing to accept. Clinging onto the baton or having a clenched fist does not make for a smooth handover. A control-obsessed person, for instance, can cause a scarcity mentality among heirs. This typically results in squandering through overindulgence or stubbornness – insistence that they don’t need anything and can do it on their own. Don’t live like you are poor when you are not. Wealth does not spoil kids; a lack of insight and understanding of wealth and the virtue of labour does. Accepting a baton means accepting the responsibility for the momentum as well.

Rule no 3: mentoring

The receiver must be trained to be in motion, ready for the handover to happen efficiently. The baton will either be dropped or the runner will overrun the receiver if the receiver stands still or is unprepared. To be able to carry inherited wealth, coaching and participation are needed. Simple things like having your children understand your monthly expenses and income and understanding the wealth that has been accumulated are steps in the right direction. Don’t dump wealth on people who do not have insight into it and don’t ever skip generations. Take responsibility for one generation at a time. Prepare them well and allow them to sort the next generation out.

Rule no 4: Don’t look back

The receiver must run forward and look towards the next generation. Issues of neglect or distant relationships can cause heirs to look back, which can negatively affect the passing of the baton. The sins of the father will last two generations, won’t they? You can’t change the past, but you can learn from it to create a better future.

In Summary…

We all constantly move along this financial continuum. One journey is mostly on our own and the other within the sphere of succeeding generations, but both are of equal importance. Understanding the rules of each journey will create a harmonious relationship with wealth within our own lifetime and a positive momentum for future generations.

Keep in mind that the baton contains much more than worldly goods and money. The rules governing generational momentum is true for everything we pass on to our heirs. Of all things, kindness is most probably the most valuable asset in that baton. Imagine a world where that happens as a rule rather than an exception.

Written by Louis Venter, Fiduciary Specialist at Carrick Consult.

Succession SA #4: The name is Bond, Mortgage Bond

In Roman Times, an heir could receive a nasty surprise when the will of a deceased parent was read. In Roman Times, an heir could inherit a parent’s debt.

What complicated matters even more, was that the inability of a debtor to repay a debt could result in the creditor demanding an arm or a leg from the debtor as an alternative settlement measure.

In present times, both inheriting a debt and debt costing you an arm or a leg is unthinkable, and, in the wise words of the infamous Asterix, one would gasp a “these Romans are crazy” at the thought of the idea.

The right to reject (“repudiate” if you want to be fancy) an inheritance was an important development in later Roman Dutch Law. If you cannot be forced to inherit, you cannot be forced to inherit debt, now, can you?

Smart move Roman-Dutchies, smart move!

The arm and the leg thing also fell by the wayside long ago (no pun intended), as did the risk of imprisonment for unpaid debt (far too recently than is comfortable really). However, to reset the balance, upon one’s demise, a pecking order in deceased estates was created to appease the creditors.

Creditors moved right to the top of the pecking order. What you own is first used to pay what you owe.

However, like the animals in Animal Farm, some creditors are more equal than others. Even within the band of merry creditors, a pecking order was created:

The top pecker being Bond, the mortgage bond.

So, when I die, and I bequeath property that has an unpaid bond registered over it – what happens?

Upon death, all your liabilities become due and payable. Your appointed executor of your estate will firstly determine all your assets and all your liabilities to establish if your estate is solvent (assets exceed liabilities). Even where your estate is solvent, the executor will also ascertain if you have sufficient liquid assets to settle the debt.

When a property is bonded, the portion of the debt that has not been repaid is a preferential liability in the estate. Nothing can be done with the property over which the bond has been registered until the bondholder’s claim has been settled.

If there is enough cash – no problem. The bond is repaid, and the property is available to either sell to settle other creditors (the less equal peckers) or to fund the administration costs of the estate.

If all creditors have been settled and the administration costs of the estate have been secured, only then can a property held in a deceased estate be inherited by an heir to whom it was awarded in the will.

So, the modern heir has moved down the pecking order in exchange for not risking life or limb for the debt of a legator. Fair exchange, one would think.

Sometimes, however, you do get a friendly bondholder who would be agreeable to allow an heir to apply for a new loan to enable the property to be transferred to the heir with a replacement bond being registered over the property in favour of the creditor. When the by-line of the financial institution says, “How can we help you?” the answer from an heir could be “a replacement bond would be helpful, thank you.”

The call here is in the hands of the bondholder. Estate planning based on the premise that a creditor will be kind to your heirs, is more often than not prone to fail. Planning to ensure sufficient liquidity in the estate is a better route to follow, as it enables executor and heirs.

Estate planning is about scenario planning, not just drafting a will. Scenario planning in estate plans starts with debt and costs, as these must be settled before the will has any relevance at all.

Failing to do proper estate planning is planning to have a failed estate plan when you are no longer there to resolve matters and could end up costing your heirs an arm and a leg in legal fees.

The fact that it has become more proverbial does not make it more palatable.

Carrick Consult is Not Guessing Maths or Law

“Failure to plan is planning to fail” is one of those often-repeated phrases one would find in many a financial planning article.  It is true of course, but if you put this dictum to the test in real life, it still is astounding to what extent people in general fail to plan.

The conundrum with estate planning is that even if you plan, the plan is never tested until after death – at which time – if the plan does not work out – there is nothing one can do.

That is simply not good enough either.


The Living L&D is an innovative product development that puts a stop to this madness.  Yes, you should plan, but at the same time the plan should be put to the test to ensure that the outcome one had in mind is realised.

Any plan can be tested through a simulation.  Financial planners “test” their plan through a simulation done on an Excel spreadsheet (or some other smart financial tool) to ensure that the growth and risk they propose on an investment achieves the desired investment outcome – one of which is the risk of longevity. 

Carrick Consult has adopted a similar simulation called the Living L&D to not only test any estate plan by simulating the administration process of a deceased estate, but also to manage the plan and the simulation over the lifetime of a client to ensure that the plan changes over time and that the simulation provides certainty that the plan works as it was intended to do.

Enrolling in the Living L&D programme achieves a number of objectives:

  • It provides a precise mathematical visual aid to a client to see for him – or herself the actual result of the estate planning.  One can see exactly who will get what, which assets will be sold and which retained, what the estate duty payable is and whether a liquidity issue exists.
  • It provides an opportunity for the advisor and the client to change the planning and see how the outcomes change.
  • It allows the estate planner to be constantly prepared for the eventuality of death as the greater part of the work that needs to be done after death is already in place.  By running the Living L&D simulation, the actual work required to be done after death is already done.
  • The avoidance of calculation errors and thought errors means that the time it takes to administer such an estate is cut in half.  Most delays in deceased estates could have been avoided through proper planning and proper planning cannot be done without running a simulation or testing the plan.

Guessing either maths or the law is simply crazy.

From this day on, no Carrick client will ever have to guess either.  At Carrick we simply don’t guess maths and we simply don’t guess the law.

To support this drive, Carrick Consult makes use of smart automation to collect the information from its clients and to import each client’s reply into its Living L&D process.  Remediation is done through a team of expert fiduciary advisors, all admitted attorneys, that work alongside the wealth advisors.

In order to encourage this change in estate planning behaviour, all costs incurred in accessing this solution are offset against any future executor’s fee and the level of adoption of the solutions will also give a client an automatic discount of between 30% and 50% of the executor’s fee.

Estate planning is a key building block of financial wellness and will never be done differently again.

Take control and ownership of your estate plan through the Carrick Consult Living L&D.  It’s the best gift you can leave your loved ones.