The Blue Roof

The Walls of Babylon

This short chapter tells of a campaign against Babylon. The King of Babylon went away to far lands to wage war. While he was away, the Assyrians attacked. It was a bad time, since most of the troops went with the King.

Day after day the citizens of Babylon heard the sound of attack, storming horses, battering rams against the gates, burning arrows over the walls. Day after day the saw wounded and dead soldiers from their own side carried away.

As the days passed, the stress increased. With each passing day people became more concerned. Everybody was concerned that the gates would last, that the walls would not crumble, that the small defending army would hold out. As days become weeks people start worrying about their losses. Losses of life, possessions and dignity.

Each day more and more people seek re-assurance that things will turn out allright.

Then after weeks, one morning the enemy is gone. The walls and gates did not fall. Everybody was safe. There was work to repair the damage, but that was another day’s problem, today Babylon celebrated the end of the siege, the beginning of new period of prosperity and opportunities.

George S. Classon closes the chapter with these paragraphs:

“Babylon endured century after century because it was fully protected. It could not afford to be otherwise.

“The walls of Babylon were an outstanding example of man’s need and desire for protection. This desire is inherent in the human race. It is just as strong today as it ever was, but we have developed broader and better plans to accomplish the same purpose.

“In this day, behind the impregnable walls of insurance, savings accounts, and dependable investments, we can guard ourselves against the unexpected tragedies that may enter any door and seat themselves before any fireside.”

The saying goes: you PROTECT wealth BEFORE you create wealth. Too many people pay a high price because they ignore this rule. The premium on car insurance may seem high, until there is a R1 000 000 claim against you. The premium on hospital insurance may seem excessive, until a child needs hospital treatment (and if you then cannot give them the best, the premium is nothing!). Somebody ALWAYS pays for life insurance, it is either YOU while you live, or your FAMILY after your death.

But protection goes further than that. It involves structuring your affairs for optimal tax benefits and estate planning. It involves compartmentalising your affairs, so that you protect assets against undue risk.

We can never be without risk, it is part of life, but we should try to protect ourselves against risk as we build our wealth.

As the chapter summary says: “We cannot afford to be without adequate protection.”

Yesterday  I said that I belief you should have enough cashflow and some knowledge before you form a trust.  Let’s rephrase:  If it is a property or a trust, go for the property.  Property will eventually help you to get a trust, not the other way around.  If you have the money, you buy the expertise you need to have a trust!

So what are the disadvantages of a trust?

First of all a trust costs money to form.  You have to pay lawyers and other admin costs.  That is only a problem if your cashflow is under pressure.   And once again, I would rather use the money to buy a property if it is an either-or situation.  This is a once-off expense.

Secondly a trust costs money to run.  You need an accounting officer to do the accounts and to do the annual financial statements.  This is a cashflow expense.  And don’t forget the banking fees, which is also very high.

The same accounting officer should preferably do the tax returns.  That is part of the previous expense.

There are many administrative and legal requirements for trusts.  That means you need some knowledge or guidance, which you can acquire or buy via an expert.

Trusts have a high tax rate.  The income tax rate is very high as is the capital gains inclusion rate.

All the above are obviously not reasons NOT to have a trust.  But it does mean that you need some cashflow and some knowledge.  And that is why I think many people invest in trusts when they should not really be doing it (yet). 

The benefits of a trusts are the following:

Trusts are excellent estate planning vehicles.  Since a trust is a totally separate entity, it owns the assets.  So whatever assets belong to the trust does not form part of your estate.  (An important fact to remember.)  Because the assets do not form part of your estate, your estate does not pay executor’s fees or estate duty on assets in the trust.  Death is a capital gains tax event, so at least in a trust you can decide when you want to pay capital gains tax.  You control selling, but mostly not death!

 You can reduce income tax payable by distributing income to trust beneficiaries who will then pay the income tax.

Trusts offer continuity.  In other words, having assets in a trust means that your descendants will benefit from your planning far into the future, perpetually.  Because of all the costs of dying, an estate is over time decimated.  Not so with a trust, because death does not influence the trust.  Also, because the assets are in trust, is does not have to be transferred and divided.

Think of this example.  You have a very nice holiday home at the beach and 3 children.  They inherit equally.   Now they each have 2 children, who inherit equally.  Then each grandchild – eventually the shares are so small, it is indivisible, over and above all the cost of transferring it all the time.  In a trust, it is not a problem.

Trusts offer protection against creditors and divorce.  It offers protection to your children against unscrupulous spouses.

So, all in all, I really like trusts.  But I don’t think every investor needs a trust before he can start investing.

What do you think?  Do you (dis)agree? Any questions?  I feel good today, so I will answer if I can, just post it!