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1 Errol Gottfried Meyer CFP Professional, Admitted Advocate of the High Court, Master Tax Practitioner (SA) 1 GUIDELINES FPI 2015 ESTATE DUTY, CGT, INCOME TAX INCOME TAX + SEC 10C BUSINESS ENTITIES AND BUSINESS INSURANCE PIETERSE CASE + SECTION 63 TVM + CASH FLOWS 2 KOLVER CASE TESTATE AND INTESTATE MATRIMONIAL REGIMES LEGISLATION CIVIL UNION + WILLS ACT + INSURANCE ACT+ INTESTATE SUCCESSION ACT

2 INVESTMENT AND INSURANCE PRODUCTS PRODUCT BENEFIT STRUCTURING GCOC RELEVANT SECTIONS FPI POLICIES AND ETHICS AUDIT OF FINANCIAL PLAN 4 CASE STUDY EXAMPLE FPI COMMENTS ON PREVIOUS PAPER EXAMINATION METHODOLOGY 5 FIND THE LOGIC, THEN THE FINANCIAL PLANNING PRINCIPLE WORKSHOP FORMAT LEARN IN CLASS ASK MANY QUESTIONS DO NOT HESITATE TO ASK ME TO REPEAT SOMETHING I HAVE SAID. STUDENTS OFTEN FAIL TO DO SO AND HOPE THAT THEY WILL CATCH UP LATER ON DURING THE LECTURE THEY NEVER DO

3 FIRST UNDERSTAND MARITAL REGIMES TO UNDERSTAND ALL TAX IMPLICATIONS. DEAL SEPARATELY WITH DIFFERENT TAXES 7 Marriage regimes And Relationships Marriage Civil union Customary marriage Domestic Partnership Islamic Marriages Opposite sex only Same and Opposite sex Also polygymous marriages Same and Opposite sex Religious marriages Registered Not registered 8 Overview of dispensation in SA Definition of spouse Treatment of life policies Beneficiary nominations

4 Estate duty is levied on all assets on by a deceased which constitutes property and deemed property in his estate. Property and deemed property are defined in the estate duty act. It is a requirement that the person must have died while ordinary resident in South Africa. It is not a requirement that a person should be domiciled in South Africa or a citizen or where the place where the death occurred. 10 Value of property Value of the deemed property Gross estate Deductions and Rebates Net estate Section 4A deduction Dutiable amount Estate duty payable 11 Property Deemed property Valuation of property

5 Rule 1 Is the deceased the life assured? If the answer is yes, proceed to rule 2. If the answer is no, then no estate duty is payable in terms of the deeming provision. Rule 2 Is the policy due and recoverable upon the death of the deceased? If the answer is yes, then the policy is deemed property in the deceased estate. Continue to rule 3. If the answer is no, then estate duty is not payable in terms of the deeming provision. Rule 3 Was someone else entitled to the proceeds and premium payer? If the answer is yes, then the deceased estate will qualify for the premiums +6% reduction. If the answer is no, then no reduction is allowed. Rule 4 HOWEVER, none of the above will apply if the policy was a so called key person or buy and sell policy. If rule 4 does not apply, then return to rule 3, 2, 1 etc. For the sake of clarity, if the deceased is not the owner but the life assured of a policy, then it may seem unfair that the deceased estate should pay the estate duty? 13 Estate Duty Instance of deceased Premium paid or borne Not for benefit of the estate May not be a family company. All the requirements are of a personal nature? 14 BUSINESS PARTNER OF DECEASED AT TIME OF DEATH NO PREMIUM PAID OR BORNE BY DECEASED PURPOSE OF THE POLICY ALL OF A BUSINESS NATURE AND NOT PERSONAL(genuine)

6 Debts due by the deceased Administration expenses Accrual to spouse Section 4 A deduction 16 4(a) Funeral, tombstone and deathbed expenses which SARS considers fair and reasonable. 4(b) Debts due in SA discharged from property included in the estate. 4(c) Administration expenses Master s fee maximum R600 Executor s remuneration Valuation expenses etc. 17 If the deceased was married in terms of the accrual system and the surviving spouse has a claim against the deceased estate, then such a claim will be allowed as a deduction from estate duty. Compare the situation where the deceased has an accrual claim against the surviving spouse, in which event the accrual will be included as deemed property in the deceased estate

7 The position of spouses married in community of property is different in this respect that the surviving spouse is of the owner of a half of the communal estate. In this instance the surviving spouse does not have a claim as in the case of the accrual system. It is noteworthy that funeral and death expenses are only charged against the half of the deceased estate in the case of marriages in community of property. Administration costs on the other hand or chargeable against the joint estate and therefore fall in the joint estate as a whole. The executor administers the joint estate and cost in such instance Property that accrues to the surviving spouse is deductible the property must have been included in the estate of the deceased The deduction must be reduced by so much of any amount that the surviving spouse is required in terms of the Will to dispose of to any other person or trust. No deduction is allowed in respect of property that accrues to a trust established by the deceased for the benefit of the surviving spouse, if the trustee of such trust has a discretion to allocate such property or any income there from to any person other than the surviving spouse. 20 Example of accrual and COP. Purpose to discuss certain aspects to clarify the principles discussed. You can work through the examples in your own time and study the example of the FPHB for a very similar example. I only made use of different amounts to assist with revision

8 Man and Woman are married out of community of property and decided to make the accrual system applicable to their marriage. They were married in 1985 and the values of the estates were stated as follows: Man Woman Man was married previously in community of property in 1980 and his predeceased spouse bequeathed the whole of her estate to him, save for R that was bequeathed to an inter vivos trust. When Man married again in 2008 he decided to marry according to the accrual system, which was introduced in 1984 and both spouses decided not to exclude anything from the accrual. 22 Assets of Man Primary Residence Sea Side Cottage -inherited from father Furniture and effects Motor vehicles Shares in company (Private) CIS investment JSE Listed shares Cash Investment Policy 1 payable to estate Policy ceded to bank Policy to spouse Bond on Primary Residence Other liabilities Estate liabilities Master's fees and Admin fees Funeral expenses Executor's fees To be calculated

9 Man also belonged to a pension fund which paid a lump sum death benefit of 1 million to his spouse. Tax will be withheld, but the total amount payable is not yet known. Woman has no liabilities, but has a property portfolio of R and a money market investment of R She was awarded an amount of a R in damages for a defamation claim while they were married. 25 Man bequeaths his house, furniture and motor vehicles to his spouse. The residue of the estate is bequeathed to his children. The CPI index at the date of marriage was and at the date of Man s death. Woman is unsure how the inheritance that Man received from his spouse when they were married are dealt with. You are required to calculate the accrual and estate duty payable upon the death of Man. 26 Assets of Man - Assets of Woman - Primary Residence Property portfolio Sea Side Cottage - inherited from father Cash Furniture and effects Motor vehicles Shares in company (Private) CIS investment JSE Listed shares Cash Investment Add

10 Policy 1 payable to estate Policy ceded to bank Total Total Less Liabilities Bond on Primary Residence Other liabilities Total Less Inherited assets Damages Total Less Adjusted initial value Accrual Accrual claim Property Primary Residence Sea Side Cottage -inherited from father Furniture and effects Motor vehicles Shares in company (Private) CIS investment JSE Listed shares Cash Investment

11 Deemed Property Policy 1 payable to estate Policy ceded to bank Policy to spouse Gross Estate Asset Liabilities Bond on Primary Residence Other liabilities Deductions to spouse Legacies to spouse Policy to spouse Accrual claim Estate liabilities Master's fees and Admin fees Funeral expenses Executor's fees Nett estate A Estate Duty payable

12 Man and Woman are married in community of property. The joint estate consists of the following assets: 34 Residential property in Dullstroom Oubos small holding - market value Collective investments Plot at Hermanus Life insurance payable to estate Life insurance payable to son Life insurance payable to spouse Bonds Administration fees Outstanding income tax

13 Man inherited a usufruct over a commercial property from his late father. Man s son is the bare dominium holder. The value of the ceasing usufruct has been calculated to be R Man also inherited a holiday home of R His father's will stipulates in particular that the holiday house must be excluded from the joint estate. 37 In terms of Man s will he bequeaths his estate as follows: The holiday house excluded from joint estate to his son A cash bequest of R to his son The residue of his estate to his spouse. Calculate the executor s fees, the residue for purposes of the estate duty deduction and the estate duty payable if Man should die today. You must also show how the estate duty liability is apportioned. 38 Estate duty calculation Property Residential property - Dullstroom Oubos small holding - market value Collective Investments Plot at Hermanus Life assurance payable to estate Total Less surviving spouse's half share Total

14 Plus assets excluded from joint estate Usufruct Holiday house - inheritance Total Deemed property not in L&D account Life assurance payable to son Life assurance payable to spouse Total Total value of estate Deductions Bonds Administration fees Outstanding income tax Executors fees on joint estate Total Less surviving spouse's half share Total Plus Executors fee on excluded assets Funeral and death bed expenses Less Life assurance payable to spouse Residue to spouse Net estate Less 4A Dutiable estate Estate duty payable

15 Residue calculation Deceased half share of joint estate Assets excluded from joint estate Total Less half share of liabilities Total Less Bequests/Legacy to son Plus Executors fee on excluded assets Funeral and death bed expenses Residue for purposes 4 (q) Apportionment of Estate Duty Son (usufruct) Son (Insurance policy) Estate Total Net estate Bequests/Legacy to son Usufruct Life assurance payable to son TOTALS

16 MARITAL REGIMES REFRESH REMEMBER ONLY MARRIAGES WITH CERTIFICATE APPLICATION ACCRUAL OUT OF COMMUNITY COP JOINT OWNERSHIP PASSIVE INCOME ACCRUE EQUALLY AND SEPARATE TAXPAYERS VPA EXCEPTION SAME PRINCIPLES APPLY FOR CGT BASE COST DIVIDED BY TWO PRIMARY RESIDENCE EXCLUSION DIVIDED BY TWO 46 Mr X is married out of community of property and under the age of 65. He has three children and they are all dependants in terms of the medical scheme that he contributes to Mr X is married out of community of property and under the age of 65. He has three children and they are all dependants in terms of the medical scheme that he contributes to. He has the following income and expenses Retirement funding salary R Commission non retirement funding R Out of pocket medical expenses R Employer contributions to medical aid R Employee contributions to medical aid R Pension Fund contributions R Retirement annuity contribution R Donation to PBO R SA interest income R Foreign dividends R Foreign interest R

17 Continue Rental income R Rental expenses R Voluntary Purchased Annuity R (Purchase price R for 5 years) Company car R Travel Allowance R Employer pays unapproved policy R SA Dividends R Arrear Pension Fund contributions R5 000 Employer short term loan Employer contribution to Pension Fund R Mr X sold a stand for R and the base cost was R Gross Income Commission Salary Bonus/Rental Income Annuities (CPA) RSA Dividends Foreign Dividends SA Interest Foreign Interest Voluntary Purchased Annuity (VPA) Taxable portion of Travel allowance Fringe Benefit - Company Car Fringe Benefit - Medical aid contributions Fringe Benefit - Insurance premiums

18 Exemptions Capital portion of VPA RSA Dividends Foreign Dividends (Stayed the same) Interest income (Stayed the same) Income Expenses incurred in the production of income Sub Total Less Assessed Loss - Sub Total Deductions Current Pension Fund Contributions Arrear Pension Fund Contributions Retirement Annuity contributions Arrear Retirement Annuity Contributions - Sub Total

19 Add Capital Gain less exclusion Taxable Capital Gain % Sub Total Less Donations to PBO Sub Total Less Medical expenses - 7.5% Taxable Income Normal Tax per tax table On R % Normal tax payable less Primary Rebate Secondary rebate Tertiary rebate Medical Credits Medical Credit - 25% Normal Tax liability % withholding Dividend Tax Medical aid deduction Employee contributions to medical aid Employer contributions to medical aid Total Contributions x medical credit Excess contributions Qualifying medical expenditure Total expenditure Less Medical expenses - 7.5% Medical deduction % to convert to medical credit

20 Reference Estate Planning Essentials May 2014 Volume E CONTRIBUTES R TO A RETIREMENT ANNUITY FUND TO SAVE ON ESTATE DUTY. TWO YEARS LATER HIS CIRCUMSTANCES CHANGES AND HE WISH TO HAVE ACCESS TO THE FUNDS. HE IS ENTITLED TO COMMUTE THE ANNUITY FOR A LUMP SUM UP TO ONE-THIRD OF THE VALUE. HE COMMUTES R TO PAY OF DEBT HE USES THE BALANCE TO PURCHASE AN ANNUITY ASSUME THAT THE ANNUITY FOR LIFE AMOUNTS TO R PER YEAR. SECTION 10C IS APPLICABLE TO A COMPULSORY ANNUITY AFTER RETIREMENT AND ONLY TO THE ANNUITANT

21 IT IS IMMATERIAL WHETHER E TOOK A LUMP SUM OR NOT. R QUALIFIES FOR THE SECTION 10C EXEMPTION. NOTE THAT IT IS AN EXEMPTION AND NOT A DEDUCTION. CURRENT RA CONTRIBUTIONS CAN ONLY BE CALCULATED AFTER THE EXEMPTION IS ACCOUNTED FOR NO INCOME TAX WILL BE PAID FOR 8 YEARS UNTIL THE R IS EXHAUSTED. THERE IS NO DOUBT THAT FINANCIAL PLANNERS MUST HAVE A GOOD UNDERSTANDING OF INCOME TAX TO FULFIL THEIR PROFESSIONAL ROLE TO MANAGE A CLIENT S SITUATION AFTER RETIREMENT. THIS WILL BECOME EVEN MORE SO WHEN THE NEW (CURRENTLY POSTPONED) RETIREMENT FUND CONTRIBUTION DEDUCTION BECOMES EFFECTIVE IN POSSIBLY 2016) 62 STUDENTS MAY VIEW A COMPLETE EXCEL CALCULATIONS WITH NOTES ON WEBSITE. The example has a reference to the updated tax tables and rates. (See documents and brochures.)

22 NAME DIFFERENT TYPES PARTNERSHIP CLOSE CORPORATION PERSONAL LIABILITY COMPANY COMPANY BUSINESS TRUST SOLE PROPRIETOR CLASSIFIED ACCORDING TO TAX SMALL BUSINESS CORPORATION PAGE 670 FPHB PERSONAL SERVICE PROVIDER PAGE 669 FPHB MICRO BUSINESS PAGE 671 FPHB SMALL BUSINESS ASSETS PAGE 716 FPHB + SARS CGT GUIDE DAVIS COMMITTEE VIEWS The gross income of a CC was R for the year of assessment % of the total receipts and accruals of the corporation consists of manufacturing income. The CC employs nine (9) employees that are not related to the sole member or his spouse. The CC acquired a manufacturing plant for R in the current year of assessment. The sole member draws a salary of R from the CC. He is despondent since the tax compliance cost of running the business is enormous and he is wondering whether it should not be better to run the business in his own name as a sole proprietor. Will government do anything to reduce the compliance cost in future? 65 Advise whether the member will be better off to run the business of the CC in his own name or in a CC as he is currently doing, especially from an income tax perspective

23 67 Tax calculation of CC Gross income R Less: accelerated depreciation allowances R Less: Salary payment R Taxable income Apply tax table R = R If he decided to operate as a sole proprietor he would not have received the protection of limited liability or qualified for the accelerated depreciation allowances or qualified for the lower tax rate applicable to small business corporations. His taxable income would have been more and taxed at 40%. The Davis committee suggested that compliance cost of small business be reduced FOLLOW MY DISCUSSION IN CLASS AND MAKE NOTES: BUY AND SELL FOR PARTNERSHIP BUY AND SELL FOR SHARES (INTEREST) FPHB PAGE 1015 SALE/SETTLEMENT OF LOAN ACCOUNT

24 BUY-BACK OF SHARES (KNOW ABOUT) BUY OUT OF SOLE PROPRIETOR BUSINESS TRUST NOTE THE DIFFERENCE BETWEEN COMPANY AND PARTNERSHIP FPHB PAGE CLASS ACTIVITY: MAKE A CRYPTIC SUMMARY WHY YOU WOULD RECOMMEND A BUY AND SELL AGREEMENT (80 WORDS) 70 SECTION 63 FPHB PAGE 242 PROTECTION OF POLICY BENEFITS MUST BE THE LIFE ASSURED (OR SPOUSE), AND HAVE BEEN IN FORCE FOR THREE YEARS DURING LIFETIME AT DEATH, BUT SEE CONDITION IF WHAT IF POLICY IS SECURED FOR DEBT? MUST PROVE ON A BOP. LOOSE PROTECTION IF INTENTION TO DEFRAUD CREDITORS. NO MORE R LIMIT 71 SCA AND IMPORTANCE THEREOF SEC 63 DOES NOT INTEND TO OVERRIDE THE COMMON LAW PRINCIPLES OF BENEFICIARY NOMINATIONS DISCUSS THE LAW OF BENEFICIARY NOMINATIONS COMPARE TO ACCRUAL CLAIM AND PERSONS MARRIED COMMUNITY OF PROPERTY. STUDENTS TAKE NOTES IN CLASS. DO YOU THINK THE INTENTION OF FRAUD PLAYS A ROLE ANSWER LIES WITH LAW OF INSOLVENCY

25 Peter has been a member of his employer s defined contribution provident fund for a period of 10 years He is 40 years old and will retire at the age of 60 He currently earns a salary of R per annum His salary should increase by 6% per annum between now and his retirement date He would like to receive an income equal to 60% of his salary after retirement 73 Assume that his life expectancy after retirement will be 18 years It is estimated that his provident fund lump sum benefit will be R when he retires He would like his income after retirement to increase by 6% per annum He will be able to invest his retirement capital at 10% per annum Calculate whether he has made sufficient provision for retirement, and if not, what amount should he invest annually at 10% per annum to compensate for the shortfall 74 Build a time frame with the following information. Follow me as I do the example and make sure that you understand all the steps

26 76 Mr X is 54 years old and he wants to know whether he has made sufficient provision for his retirement capital at the age of 60 years. His needs and wishes are as follows: He wants his income after retirement to be provided to the age of 80 His income after retirement must increase annually by a rate of 8% per annum (inflation rate) On retirement he also wants to purchase a car that is currently valued at After retirement he wants an income of per annum 77 To date he has made the following provision: Pension fund value to be calculated at the age of 60. His current retirement funding salary is R pa. His total contributions to the pension fund are 11% and the net contribution after administration expenses and cost is 9%. The current value of his pension fund is Retirement annuity fund value to be calculated at the age of 60. His current value in the fund is and he contributes pa to the fund. He has a collective investment scheme. The current value is

27 Assume the following: His salary will increase with 8% pa The average return on his investments will be 12% The inflation rate is 8% before and after retirement 79 You are required to do the following: Calculate the shortfall on retirement, if any. In case of a shortfall, the level contribution needed to make up the shortfall. In case of a shortfall, the lump sum needed today to make up the shortfall. In case of a shortfall, the escalating contribution needed to make up the shortfall PV 6 N 8 I/YR C/FV

28 PMT 20 N 3.7 I/YR C/PV PV 6 N 8 I/YR C/FV Lump sum at retirement Future value of car Total Capital needed

29 PV 6 N 12 I/YR C/FV PMT 6 N 3.7 I/YR C/PV PV 6 N 12 I/YR C/FV

30 Total value of Pension Fund = = PV PMT 6 N 12 I/YR C/FV PV 6 N 12 I/YR C/FV

31 Pension Fund Retirement Annuity Collective Investment Scheme Total capital available Total Capital needed Total capital available Shortfall FV 6 N 12 I/YR C/PMT

32 FV 6 N 12 I/YR C/PV PV 6 N 3.7 I/YR C/PMT Are partners in a permanent same sex life partnership regarded as spouses for intestate succession purposes? In the case of Gory v Kolver NO and Others (Starke and Others Intervening) 2007 (4) SA 97 (CC), the Constitutional Court ruled that partners in a permanent same-sex life partnership should be regarded as spouses for intestate succession purposes. In the Gory case the applicant, Mark Gory, and the late Henry Harrison Brooks (the deceased) were at the time of the latter s death partners in a permanent same-sex life partnership in which they had undertaken reciprocal duties of support. Mr Brooks died intestate on 30 April 2005, and his parents, the 2nd and 3rd Respondents were nominated by Mr Daniel Kolver, 1st Respondent, to be appointed by the Master as the executor of their son s estate. Source: SUMMARY OF Gory case and application by Peter Baker (shortened by me)

33 They claimed to be the deceased s intestate heirs and entitled to his estate. Mr Gory also claimed to be the deceased s sole intestate heir. This resulted in Mr Gory launching motion proceedings in the Pretoria High Court in The Court looked at Section 1(1) of the Intestate Succession Act 81 of The Court found that this sub-section was unconstitutional and invalid, as it did not include partners in a permanent same-sex life partnership in which the partners have undertaken duties of reciprocal support. The Court found that these parties should also be regarded as spouses for purposes of intestate succession The Court found that the applicant and the late Henry Brooks were at the time of the death of Mr Brooks, partners in a permanent same-sex life partnership in which they had undertaken reciprocal duties of support. The applicant was declared to be the sole intestate heir of the late Henry Brooks, and the 1st Respondent was removed from his office as executor of the estate of the late Henry Brooks The subsequent enactment of the Civil Union Act has however limited the application of this decision as same-sex couples who enter into a marriage or civil partnership in terms of the Civil Union Act now enjoy the rights of spouses in a civil marriage in terms of the Marriage Act 25 of In particular, the Civil Union Act allows for both heterosexual and same-sex couples to enter into a civil partnership or marriage, provided certain formalities are met

34 READ INTESTATE SUCCESSION ACT FOR DEFINITIONS (SHORT ACT) SEE DEFINITION OF SPOUSE NOT APPLICABLE ONLY FOR TAXES CASE LAW SAME SEX PARTNERS IS A SPOUSE FOR PURPOSES OF THE INTESTATE SUCCESSION ACT. SEE FPHB EXAMPLES SELF EXPLANATORY PAGE WEBSITE REFERRED ABOVE. NOTE THAT THE R IS REPLACED WITH R Implement Contact/ Contract Solution Needs Causal link 101 Doctor Medical diagnosis Pharmacy Financial Planner Risk diagnosis Product

35 SUBORDINATE LEGISLATION CONTEXTUALIZES OTHER CODES DERIVED FROM FAIS LEGISLATION Provider means a FSP, and includes a representative Know sections 2, 3,7,8 and 9 Source: Financial Advisory and Intermediary Services Guide Charles Pillai and Others - LexisNexis 103 TWO STAKEHOLDERS = CLIENTS AND FINANCIAL SERVICE, INDUSTRY PROVIDER MUST RENDER FINANCIAL SERVICES HONESTLY, FAIRLY WITH DUE SKILL, CARE AND DILIGENCE, AND IN THE INTERESTS OF CLIENTS AND THE INTEGRITY OF THE FINANCIAL SERVICES INDUSTRY THREE ASPECTS REQUIREMENTS FOR PROVIDER TO RENDER A FINANCIAL SERVICE APPROPRIATE PROCEDURES AND SYSTEMS DISCLOSURE OF CONFIDENTIAL INFORMATION

36 CLASS ACTIVITY: COMMENT ON THE FOLLOWING: THE INSTRUCTIONS AND CONTRACT ENTERED INTO WITH THE CLIENT FORMS THE BASIS OF THE ADVICE FACTUALLY CORRECT TECHNICAL LANGUAGE PERMISSIBLE LEVEL OF KNOWLEDGE OF CLIENT IRRELEVANT ONE DAY IS ENOUGH TIME FOR A CLIENT TO MAKE A DECISION INFORMATION PROVIDED MUST BE IN WRITING ALL PRE DETERMINABLE AMOUNTS MUST BE EXPRESSED IN MONETARY TERMS PROVIDER IS RESPONSIBLE IF RECORDS ARE DESTROYED BY FIRE RECORDS MUST BE KEPT FIVE YEARS FROM DATE THAT THE FSP ACCEPTS THE INSTRUCTIONS OF A CLIENT. RECORDS MUST BE KEPT AT THE PREMISES OF THE FSP A FINANCIAL ADVISER MAY IN THE SCOPE OF HIS DUTY DISCUSS THE AFFAIRS OF THE CLIENT WITH OTHER PROFESSIONALS IN ORDER TO PROVIDE THE BEST SERVICE TO THE CLIENT COMPREHENSIVE INFORMATION REGARDING THE FINANCIAL SERVICE ALWAYS FOR A CLIENT TO MAKE AN INFORMED DECISION FINANCIAL PRODUCT BENEFITS INVESTMENTS RANGE OF DUTIES RE FEES AND DISCLOSURES NOTE LOADINGS AND WAIVERS TAX CONSIDERATIONS CONSEQUENCE OF MISREPRESENTATION BY THE CLIENT (LIFE COVER)

37 PRIOR TO PROVIDING ADVICE FINANCIAL SITUATION, PRODUCT EXPERIENCE AND GOALS CONDUCT AN ANALYSIS ID FINANCIAL PRODUCT IRO CLIENT RISK PROFILE REPLACEMENT PRODUCT SPECIFIC DETAILS (I SUGGEST TAKE WITH YOU A GOOD TEMPLATE OF CRR + ROA) CLIENT MUST BE ABLE TO MAKE INFORMED DECISION (THUS UNDERSTANDS THE ADVICE) WHEN CAN YOU PROVIDE LIMITED ADVICE? PROVIDER MUST MAINTAIN A RECORD OF THE ADVICE BRIEF SUMMARY FINANCIAL PRODUCTS CONSIDERED RECOMMENDED = WHY SUITABLE REPLACEMENT COMPARISON MUST PROVIDE A COPY OF THE RECORD SEE EXAMPLE IN Source: Financial Advisory and Intermediary Services Guide Charles Pillai and Others - LexisNexis

38 Purpose of the workshop exercise Group work is fundamental to the seminar The Sales versus Compliance Process Facts of the Case Study Theory Cash flow and product recommendations We will follow a practical approach as to what the financial adviser encounters in a real life setting. The delivery method is a come to life situation in a case study scenario, specifically designed to incorporate all latest legislative changes, and underpinning the financial planning principles that is required of a financial planner to render compliant advice. Such an approach will source all the selling opportunities, which is nothing else than a correct identification of the risk profile of a client in terms of FAIS requirements Implement Contact Solution Needs Causal link

39 Do group discussion 1 FAIS is nothing than a sales manual Analyse the doctor and pharmacist relationship Present your findings Make applicable to Financial Planning Read the facts of the case study Prepare the contractual terms and write down the salient features of the client and financial planner engagement Establish the contractual relationship Group work Analyse the financial affairs Group work Recommendations (casual link) Group work Implementation Group work

40 Calculating the accrual claim Eric Belinda Current value of assets Personal Assets Business Interest(s) - - Property Investments Life Policies payable to Estate Liquid Investments Less liabilities Total Liabilities Revalue commencement values Value for purposes of accrual Accrual claim by Mrs Meyer Calculating the accrual claim Eric Belinda Current value of assets Personal Assets Property Investments Liquid Investments Less liabilities Total Liabilities Revalue commencement values Value for purposes of accrual Accrual claim by Mrs Meyer Property Personal Assets Business Interest(s) 0 Property Investments Liquid Investments Deemed Property Life Policies payable to Spouse Life Policies payable to Estate Life Policies payable to third parties Gross Estate Liabilities

41 Deductions to spouse Life Policies payable to Spouse Bequests to spouse - Primary Residence Accrual claim by Mrs Meyer Estate liabilities Master's fees 600 Last expenses Executor's fees Income Tax and CGT - Net estate A Estate Duty payable Residue of the estate TOTAL ASSETS Primary Residence in Johannesburg Plot in Clarens Furniture and Household effects BMW Flat in Pretoria Life Policies payable to Estate Collective investment Scheme Cash DEDUCTIONS Less Liabilities of Estate Liabilities Less Estate liabilities Estate liabilities Less Accrual Accrual claim by Mrs Meyer Less Bequest to spouse Bequests to spouse - Primary Residence Available to children from estate

42 Cash in the L&D account Cash out in the L&D account Life Policies payable to Estate Liabilities Liquid Investments Estate liabilities Surplus Mrs Mayer will receive at Mr Mayer's death Life Policies payable to Spouse Retirement Annuities - Surplus cash from the estate Tax on retirement fund R % Total tax payable

43 Children will receive Policy C payable to children Retirement Fund Cash from estate Complete calculations in Notes on Estate and Financial Plans Meyer on Case Studies Shortfall : Level premium R4 245 Escalating premium R2 763 pm Spouse: R less available = R Children: R = adequately provided for (R )

44 Recommend: Life policy to pay for accrual claim on life of wife. Life policy to pay for income for wife. Investment contributions for retirement Income Protector to replace salary Medical aid (ignore late joiner penalties) Finalize the last will and testament Calculate the tax savings and cash flow of above. Explore the cost and benefits of ancillary risk areas Income of Mr Mayer Amount Income of Mrs Mayer Amount Total Salary Salary Rental Income Interest Dividends 375 Expenses Bond Credit Card 90 Car Life Assurance Retirement Annuities - Household expenses Overdraft interest 650 Fuel Entertainment Income tax per month Policy to pay accrual for Mrs Mayer 357 Policy to pay for the income of Mrs Mayer Investment contributions Income protector Medical Aid Surplus

45 Tax savings per month Retirement annuity Medical aid credits (WHAT IS WRONG AND Income protector HOW WILL WE FIX THE PROBLEM?) Cost of additional products R8 392 Tax Savings R2 596 THE ACTUAL COSTS ARE R5 796 Client has surplus of R6 641 per month What about ancillary benefits and how will it be afforded? Analyse existing products Cost expensive Benefits only life cover and retirement Should existing policies be replaced Duty of financial planner! Compare doctor patient relationship. Current R2 800 for R Children has sufficient and policy to children not necessary

46 Life cover R for R1 478 instead of R Purchase ancillary benefits after discussion with client. Surplus funds are available Implement Contact Solution Needs Causal link 137 You are not required to provide the best opinion as a financial adviser, but only to provide a reasonable answer and be able to show that the product was not motivated by self interest. In other words, demonstrate the causal link and ensure the client accepts the recommendations based on the understanding that he made an informed decision

47 Accelerated benefit cheaper Stand alone more expensive Can purchase a reinstatement option. (Must indicate why, such that life cover may become relevant after the event of disability) Apply to case study: Risk profile Eric Life cover for capital expenditure + spouse maintenance. Should one accelerate cover for capital expenditure only since they must be payable once, either on death or disability. Capital debts liquid investments - R Income protector Purpose to provide monthly income since he cannot perform occupation. (causal link) Total sum is monthly benefit 12 benefit term in years Product is sold as stand alone benefit only. Make applicable to case study New developments 2015 How should existing plans be changes to incorporate the tax changes? Purpose is loss of future loss of income and costs associated with being disabled

48 IP Indemnity for loss of income (Temporally and permanent) Client does not carry investment risk To service ongoing debt and living expenses D Protection against loss of future income (Permanent) - Explains why used for business assurance and Trusts Client carries investment risk To settle capital debt Term of risk is relevant. (causal link) Purpose of inflation options should be documented and linked to risk profile of the client. There must be an acceptable reason (causal link) for the recommendation of inflation options Purpose income stream equal to the premium due on an underlying policy

49 Purpose to provide for immediate expenses and to help insure access to the best medical care and rehabilitation therapy should the insured suffer a serious medical illness. (Cancer, heart attack, stroke and coma) (causal link) Not intended to replace income. Cover severe medical events that will have an impact on lifestyle. FA must therefore assess the cost replacement of the risk in his records. Medical diagnosis instead of claims assessor. Definitions in contract precise and clear. These benefits and the particular medical aid fund/option must be viewed in conjunction to determine the real risk of the client. The medical aid contribution qualifies for tax relief as opposed to the dread disease contribution. The actual medical cost may qualify for tax relief Physical impairment products typically only provide cover for loss of limbs (fingers, hand, foot, arm, leg), speech, hearing, vision, confinement to a wheelchair and severe burns. In practical terms it covers conditions that will impair one's ability to move physically. (causal link) Spear fishermen have real danger of losing limb due to shark attack which are (lately) seldom fatal. Functional Impairment usually covers impairment of any limb or organ (i.e. whole body cover) whereas physical impairment covers only the limbs and senses mentioned. The benefit is not intended to replace income and thus not linked to the ability to perform your current job Disability is preventing you to carry on with current job FI Insured against the loss or impairment of a particular function and not the ability to continue generating an income. A lump sum or monthly income amount is paid to provide for the costs associated with living with impairment, such as specialised care, equipment or a home nurse. (causal link)

50 Different cultures have different values and may accord funeral cover higher a higher priority than other cultures. This causal link must be documented LOADINGS Health related. Additional amount to premium to cater for higher risk. EXCLUSIONS Dangerous activities Suicide MUST BE ABLE TO COMMENT ON A FACT FUND SHEET SEE THE EXAMPLE (EXAMINER FEEDBACK ON FEBRUARY 2014 EXAMINATION) ON THE FPI WEBSITE IN RESPECT OF INVESTMENT COMPARISONS IN RESPECT OF: FEES, RISK AND RETURN EVALUATION OF SUITABLE INVESTMENT VEHICLE (TAX) EVALUATION OF APPROPRIATE INVESTMENT FOR CLIENT. REGULATION

51 SEE UNIT TRUST HANDBOOK MARCH 2014 CHAPTER 3 COSTS AND PRICING LOW INFLATION SCENARIO VS HIGH INFLATION SCENARIO ENTRY COST ANNUAL COST ADVISERS FEES TOTAL EXPENSE RATIO S INITIAL CHARGES VS TRAILER FEES SWITCHING COSTS IF UPFRONT FEE IS PAID IMPACT OF DIVIDEND WITHHOLDING TAX WHAT IS BENCHMARKS CHAPTER 6 INVESTMENT RISK LIQUIDITY RISK BETA ANALYSIS ACTIVE RETURNS AND ALPHA STANDARD DEVIATION VOLATILITY SHARPE RATIO RISK PROFILING VISION MISSION 8 TABLE OF CONTENTS KNOW WHAT EACH PARA IS ABOUT

52 VISION MISSION 8 PRINCIPLES KNOW THE 10 ELEMENTS OF THE CODE KNOW THE CODE WELL ENOUGH TO FIND A RELEVANT ASPECT IF TESTED GOOD IDEA TO DRAW A COMPARISON BETWEEN THE FPI CODE AND THE FAIS CODE! GOOD LUCK WITH THE EXAMINATIONS See Notes on Estate and Financial Plans Meyer on Case Studies 3 rd Edition to be published in March