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Should I Set Up a Trust?

Many people consider setting up a trust without realising the severity of their decision.

Andrew Padoa

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A trust can be described as a legal relationship which has been created by the founder who places assets under the control of trustees. This either happens during the founder’s lifetime (inter vivos trust) or at the death of the founder (testamentary trust). This article will focus on the advantages and disadvantages of an inter vivos trust.

Advantages of a trust

Reducing estate duty

Inter vivos trusts can be used to minimise estate duty. No estate duty should be payable on assets owned by the trust as a trust does not die. Estate duty is currently taxed at 20%.  This estate duty saving can be substantially large especially for high net worth individuals who are worth millions of Rands.

Protection against creditors

As the trust’s assets are not owned by the beneficiaries, creditors do not have a claim on the assets. This advantage is especially important for people who have exposure to potential liability. Companies as well as individuals are able to transfer assets into trusts. A few years ago, an airline company was liquidated and the creditors never had a claim on the airplanes. This was because the planes were in the name of a trust and the company rented these planes from the trust.

Efficient succession

Because trusts never die, beneficiaries will be able to continue enjoying the asset if one beneficiary were to pass away.

Disadvantages

Costs

The costs of setting up a trust can be high. It can cost R 20 000 to set up the trust. If assets are transferred into the trust then transfer duty needs to be paid. Transfer duty is taxed according to a sliding scale.

Duties of trustees

Trustees could find themselves personally liable for losses suffered by the trust if it can proven that they did not act with care, diligence and skill according to Section 9 of the Trust Property Control Act. It is important to note that “skill” is more than just acting in good faith. Trustees may be proven negligent not only if they invested in risky investments, but also if they invested capital too conservatively causing the capital not to grow sufficiently. Trustees also need to be aware that they can still be held liable if only one trustee has signing power on behalf of the trust and he/she makes a poor decision that finds all the trustees liable for his negligence.

Loss of control

The founder of the trust needs to aware that the assets in the trust do not belong to him/her anymore. The assets belong to the trust. Should a loss of control not occur, the trust may be seen as an alter ego of the founder which could result in the assets being included in creditors’ claims as well as having estate duty consequences.

Tax

The earnings from the assets in the trust are taxed at 40% and interest exemptions do not apply to trusts. Also, the inclusion rate for Capital gains tax for an Inter vivos trust is 66,60% whereas the inclusion rate for individuals is 33,30%.

As we can see from the above, a trust is not for everyone. It is important to weigh up the advantages and disadvantages before deciding whether to go ahead or not. The best decision would be to speak to a Certified Financial Planner® who can assist you in making the correct decision for your personal situation.

Andrew Padoa works in the Private Client’s division at Consolidated Financial Planning. His area of expertise is investments, estate planning, retirement planning and portfolio benchmarking. He has had numerous articles published in the media on a number of topics related to personal financial management. Andrew is passionate about educating people and has given several financial literacy talks to both schools and corporates. His objective is to use his abilities and knowledge to help others achieve their financial goals. Visit www.consolidated.co.za for more information

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Start-up Advice

Establishing A Start-Up Business And The Challenges Of Internationalising

The business plan can then unfold to secure resources needed to meet international demand and, with enough foresight and planning, make the business a profitable entity in both local and international markets.

Martha Jameson

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To begin, a start-up is a business looking to establish a product or service for the first time. They’re perceived as young companies initiating a start within their local economies with the solid intent of providing something new for consumers. Once established in local markets, start-ups can then initialise global expansion creating a broader market for their product. The process of establishing a company does not come easily however; and to succeed an entrepreneur must be readily prepared for the challenges ahead.

The first and foremost part of establishing a company, is defining the company’s inner vision. The inner vision covers what the company desires to offer their consumers, the values they look to instill in their employees to provide the consumable or service, the objectives that necessitate the company’s promise, and directives or order necessary to progress the company path. The inner vision serves as the company’s foundation, a game plan or playbook used to project them into the world of entrepreneurship.

Once a company understands their vision, they can then look to the markets to analyse the need or value of what they have to offer.

Related: Attention Black Entrepreneurs: Start-Up Funding From Government Grants & Funds

Market analysis is the second set to establishment. One must look to the market first to see what the demand is. Where there’s demand, there’s consumers. This step is often overlooked in the initialisation process, and tends to be where most companies falter. There’s more enthusiasm involved in just jumping into the market, than there is taking the necessary step back to view the market pragmatically.

“Thus, companies may fail to offer something new or better than what already exists in the economy. Market analysis grants a business the foresight necessary to gain a stable foothold, and permits an entrepreneur the chance to tailor the company vision and goals to consumer demand,” says Amanda Jicks, an entrepreneur from WriteMyX.

Once entrepreneur understands what’s available and necessary, the company can then project their personal goals on the market. What do they bring to the market, how does their provision differ from what competitor might have to offer. This analytical groundwork allows the a company to establish the foundations they’re going to lay and process further projections for future growth.

After the goals are set into the company’s plan, an entrepreneur must then culminate the resources that will  get the company off the ground. This, of course, is establishing the production necessary for consumables or company attendance necessary for services, obtaining the funds to create and employ, calculating and providing for the costs of advertising and branding to get the company’s name out into the market as a profitable entity.

Local Markets lay down the baseline and a company should secure their local market before seeking expansion into the global or international market. Security within the local market grants companies a better means to attain the provisions necessary for growth.

“To further the foothold analogy, picture the entrepreneur as a base jumper. An experienced base jumper isn’t going to approach the cliff underprepared. They would know the site lept from, the best place to sink their line into the cliff’s face, the “foothold” that secures the line for the jump,” says Nolan Harris, a business writer at 1Day2Write and OriginWritings.

Related: 21 Steps To Start-Up Success

When a company is secure in their local market, they can then consider expansion and better face the challenges that accompany expanding into the international market. These challenges range from product or service alterations that may be necessitated due to import/export technicalities. Language barriers that may arise when promoting or branding beyond the local market.

Language barriers that may occur when communicating with the company’s customers. There’s also the cost of provision when considering international expansion. International expansion can be perceived as a daunting risk if the company isn’t ready to provide and may, in fact, not be the correct direction for all start-ups. But, if internationalisation is a goal the entrepreneur should initiate the launch with the same analytical approach used for the local markets; as the need and demand may differ from local market projections. The business plan can then unfold to secure resources needed to meet international demand and, with enough foresight and planning, make the business a profitable entity in both local and international markets.

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Start-up Advice

7 Top Lessons You Can Learn From The US Cannabis Market

The benefit of not being the first country to start the process of legalising weed, is that we can learn from the mistakes and pitfalls US entrepreneurs made when cannabis became legal in their states.

Nicole Crampton

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US entrepreneurs have already launched and successfully grown their recreational cannabis businesses. It wasn’t a flawless transition in some states from illegal to legal, they made mistakes and focused on underperforming strategies or on not hiring the right experts.

The bright side is, you can learn from their pitfalls, ensure your business has a competitive advantage and that you are prepared for the major shifts the US cannabis market experienced.

Since the South African Cannabis Industry will undoubtably have 24 months to wait until any legalisation progress is made, you can start preparing your cannabis related business and strategising how to incorporate the following lessons:

Lesson 1: Don’t be the first

Under normal circumstances you would want to be the first to break grown on a new industry, because the early bird doesn’t have competition yet, develops a relationship with customers and is the only supplier until another business gets up and running.

So then why shouldn’t you be first? The answer is “There is a difference between pioneers and settlers. Pioneers got arrows and settlers got land,” says Christian Hageseth, founder and CEO of Denver’s Green Man Cannabis, a retail and grow operation well-known for its connoisseur grade craft cannabis, and for ONE Cannabis, a cannabis business franchise.

“I’m much more interested in being a settler in the cannabis industry. You don’t know how regulators or banks are going to react as legalisation changes, so it’s beneficial to not be the first to market.”

Lesson 2: Make a proper transition from the black-market to the legal market

marijuana-legal-market

In the US Market those transitioning from black-market to the legal market found there were rules and regulations they weren’t even aware of, which made it difficult for them to stay compliant. If you’re undertaking the same transition, there are a few things you’ll need to keep top of mind:

  • There will be regulations and legislations that you aren’t aware of that you need to be compliant with.
  • You will now be operating in a tightly-regulated space with tax and banking restrictions, business owners can find themselves entirely unprepared for the pressures of keeping a legal operation in the red.
  • You’ll need to keep detailed financial and accounting records to ensure your business remains compliant and sustainable.

Related: 10 Cannabis Business Opportunities You Can Start From Home

Lesson 3: Hire the right experts

Navigating the still-forming cannabis industry can be challenging. In the US cannabis industry entrepreneurs thought they could navigate it themselves or were scammed by con artists pretending to be experts.

To ensure your business remains sustainable and compliant here is some advice on what to look for in your experts:

“It’s in your best interest to find an accountant who has been through an audit or two with a marijuana company. If you don’t file your taxes the right way from the start, your business can get very far behind,” says Hageseth.

“Your business will greatly depend on the legislation in your market, so work with a lawyer who is well versed in several cannabis markets and regulatory frameworks in order to best protect your business,” says Chloe Villano, founder of Denver-based Clover Leaf University.

Ensure you’re hiring a legitimate expert

A common misstep made by US entrepreneurs is hiring amateurs posing as experts. Scammers see the opportunity to benefit off your business by misrepresenting themselves as experts in the cannabis industry.

Keep on the lookout, they’ll tell you everything you want to hear, but don’t have anything to deliver or back it up. Do your due diligence to ensure your business is working with a competent advisor and isn’t being misled by a scam artist.

Lesson 4: You don’t need to grow or sell weed to make money

In the US, the price of marijuana skyrocketed just after it was legalised. According to Forbes the average wholesale cost of cannabis in Colorado dropped from $3 500 per 0.45kg’s at the start of legalisation in 2013, to roughly $1 012 per 0.45kg’s in 2018.

This is because sellers were adjusting their prices based on demand. As more competition enters the market, experts are predicting the price of cannabis to plummet. In Oregon, marijuana is already selling at $50 per 0.45kg’s, which is driving some cultivators out of business.

If you consider the above trend, growing and selling weed directly could be one of the least profitable approaches. In the US, there are very high barriers of entry to growing and selling cannabis that include applications, lawyers, security compliance, tax fees, audits, your inability to claim business expenses, and the constantly changing regulations.

For example: On 1 July 2018 in California, the packaging and testing standards for cannabis were changed. Every dispensary had to throw out all of their products that didn’t meet these new regulations. This cost entrepreneurs millions in inventory and a few weeks later the state changed the regulations back.

You can still make a profit from the marijuana industry, without actually selling or growing it yourself.

Related: The Ultimate 101 List Of Business Ideas To Start Your Own Business In South Africa

Lesson 5: What you need to know about pricing

weed-pricing

As mentioned above, with the rising demand for cannabis, in the US market, the price shot up. “The main thing we found wasn’t that you couldn’t get product, it’s that you couldn’t get product cheap,” said Dave Cuesta, now the chief compliance officer for Native Roots, the largest dispensary chain in Colorado.

In 2014, he was an investigator for the Marijuana Enforcement Division, he says: “You could walk into a store that sold both medical and recreational, and you were paying $30, $35 for an eighth on the medical side, and it was $60 or $70 on the recreational side. People were just adjusting their pricing to manage supply.”

Since this is likely to happen within the South African market as well, you can implement a strategy to have more supply than your future competitors. This will enable you to undercut the market when the demand for both medicinal and recreational marijuana increases.

Lesson 6: You’ll need to be adaptable

As mentioned previously, in the US regulations fluctuated until the government could determine the best way forward. Since this will also be a learning curve for parliament you’ll need to be able to pivot or agilely handle each change as it’s thrown at you.

Here are a few examples of changes the US entrepreneurs had to navigate:

For example: Content producers in California face fees and legal penalties if they mention any unlicensed cannabis brands.

Another example: Brands in Colorado, Washington and California that used the event High Times Cannabis Cups to move their product, suddenly lost a major source of income when vending was no longer allowed at the event.

A further example: In Washington DC, marijuana events that were legal last year are now being raided and people are being arrested.

If you don’t move with the industry you’re either going to be left behind or find yourself being fined or imprisoned for breaking the law.

Lesson 7: Raise more capital than you need when starting out

Considering how often regulations changed in the states in first few months, even the first few years, you’ll need to be able to afford to handle any changes that your business comes across.

 “Always raise more money than you think you need and don’t expect business to come easily. In fact, expect everything to go wrong, because the regulations will change often, and your plan will become obsolete,” explains Villano.

Changing regulations can cost you an entire crop or all of your painstakingly designed, unique and innovated, costly packaging. Ensure you remain agile and be flexible enough to handle any unexpected costs that come along.

By implementing these top lessons and seeking the expertise of financial and legal professionals, you can successfully navigate the cannabis industry. To run a sustainable business that will achieve long-term growth your venture will need to jump the cannabis industry’s unique hurdles, maintain compliance and avoid costly and often business-ending fines.

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Start-up Advice

Your Best Ideas Are The Ones No One Else Believes In

Airbnb, Rent the Runway and Foursquare all seemed odd – or even off-putting – at first glance.

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As you consider new ideas for your next project or business, give extra credence to the things you believe to be true that others doubt. The most exciting products are created by people with tons of conviction for something that strikes most others as odd. I’ve heard from Joe Gebbia, co-founder of Airbnb, that when he and his co-founder Brian Chesky pitched the idea of having strangers sleeping in your home when you weren’t there, many investors shifted uncomfortably in their seats.

One investor shared that he had never had such a visceral negative reaction to a business idea, ever. Jenn Hyman and Jenny Fleiss, co-founders of Rent the Runway, told me they encountered similar doubts when they pitched the idea of renting dresses rather than owning them.

For both teams, first reactions from people were often strongly negative. I cringe to think what focus groups would have done with these ideas. But, Chesky and Gebbia, and Hyman and Fleiss, were undeterred. To these founders, their ideas were obvious and they set out to find investors and employees who got the vision when most everyone else did not.

While he is an outspoken and notoriously controversial contrarian, Peter Thiel has had undeniable success starting and investing in highly disruptive businesses that were, without a doubt, venture worthy. PayPal, Palantir and Facebook to name a few.

In order to gauge whether something he is persuing is venture-worthy, there is one question he asks everyone he interviews or invests in: “What important truth do very few people agree with you on?”

Related: 5 Actionable Tips For Novice Entrepreneurs To Skyrocket Their Business

In his book Zero To One, Thiel goes on to explain why he asks the question and what he looks for: “This is a question that sounds easy because it’s straightforward. Actually, it’s very hard to answer. It’s intellectually difficult because the knowledge that everyone is taught in school is, by definition, agreed upon.

And it’s psychologically difficult because anyone trying to answer must say something she knows to be unpopular. Brilliant thinking is rare, but courage is in even shorter supply than genius.”

He goes on to share some examples: “Most commonly, I hear answers like the following: Our educational system is broken and urgently needs to be fixed; America is exceptional; there is no God. These are bad answers. The first and the second statements might be true, but many people already agree with them. The third statement simply takes one side in a familiar debate. A good answer takes the following form: ‘Most people believe in x, but the truth is the opposite of x.'”

Chesky and Gebbia believed that most people thought hotels were the only option for travelers, but the truth was that renting someone’s extra room was cheaper with an added dose of personalised hospitality – and likely a higher margin business as well. Hyman and Fleiss believed that most people thought they needed to buy the dress they wanted to wear, but the truth was that you didn’t need to own a dress that you only wear a few times. Both teams set out to challenge old customer preferences with modern technology and logic.

If you can discern a truth early on and start it before anyone else, then you can front-run the future.

As a manager, this may take the form of believing that people with less experience but lots of initiative tend to outperform experts. It may mean looking past the traditional resume. As an entrepreneur, this may be a conviction that some social stigma, like sleeping in someone else’s home (Airbnb), wearing someone else’s dress (Rent the Runway) or persistently sharing your location with all your friends (FourSquare), will lessen over time and eventually disappear.

Related: 4 Fundamentals To Successfully Jump-Start Your Start-up

Over the past five years, as I have chronicled the lessons learned by great founders and leaders traversing what I’ve come to call “the messy middle,” I have noticed a few recurring themes that I cover in my new book by the same name.

Chief among them is the need for us to learn to value conviction over consensus. While our natural human tendency is to seek validation from others and avoid disagreement when possible, the business of innovation is different.

You need to develop tactics to recognise and double down on the deep conviction you have in your gut that nobody else understands. Stop looking for consensus or opportunities that seem obvious and compelling at first glance. Great opportunities never have “great opportunity” in the subject line. Honing your gut instincts and acting upon conviction is a theme of every successful journey.

This article was originally posted here on Entrepreneur.com.

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