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Ask a Tax Man – Retired, why you should donate to your children

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Q

Hi, after raising our children I went back to work for a while but realised that I was no longer suited to the corporate lifestyle. I was fortunate in that my husband was in the position to take care of our family with his income alone and could focus on our children and starting a small business. I have successfully operated three independent gifting boutique stores for more than 20 years and want to now sell them as going concerns.

We do not need the proceeds to retire as my husband has taken care of that. It is a little nest egg for us to cover the occasional splurge, treat, or dream travels if they come up and then of course, what I want to leave our three kids.

The reason I am contacting you is because I would like to know your opinion on what the best course of action is with regards to where to put the money? Do I give each child their share now? Do I invest it and bequeath the money in my will? I know that each decision has a different set of tax implications. I look forward to hearing from you. – Colleen

A

Hi Colleen, thank you for the question. Investing is a very personal almost spiritual decision, especially when it comes to your children. It is like looking into a glass ball to see a future that you might want or even not want for your children.

Personally I would invest on behalf of my children and not give them a lump sum. Factors that you need to look at before you make a decision, include the age and the financial needs of your children in the next few years.

From a tax savings perspective you would utilise the annual R100,000 donation tax exemption to donate to each individual child proportionality, In doing so you are reducing your personal estate and in the process your estate duty tax .

I would use one or a combination of the following investments options, depending on your preference. Remember you only have a R100,000 donation tax exemption per year.

Tax Free Investment Savings Account

  • You can contribute R30,000 a year and R500,000 over the life time of the investment.
  • No tax on interest and dividend received form these tax free savings investments
  • No capital gains tax on the growth of the investment
  • You have the flexibility to withdraw from a tax free savings account at any time. However if you withdraw it will count against your yearly and lifetime contributions.

Contribute to a retirement annuity fund on your children’s behalf. 

  • The Contributions are tax deductible against the children’s  taxable income – they may deduct up to 27.5% of their gross remuneration or taxable income (whichever is the higher) in respect of their total contributions to a pension, provident or retirement annuity fund, subject to an annual limit of R350,000 any excess contribution is carried forward to the next year.
  • Investment returns are tax free – there is no income tax or capital gains tax on the investment return earned in a retirement annuity
  • Benefits are taxed on a favourable basis – lump sum benefits are taxed on a sliding scale with a portion of the benefit tax free
  • Your children may retire and claim your benefit form an age of 55 onwards. They can take currently up to 1/3 of the investment as cash but the balance will be paid as an annuity.

Funds available after your donation of R100,000 to your children’s investment could be invested using the same options for tax benefits in your personal estate. You can nominate your children as beneficiaries.


Interested in  a career as a tax specialist and financial consultant? Here’s what you need to know


It is important to understand that your investment portfolio should be reviewed at least on an annual basis, what is the norm today might not be the norm tomorrow. It is critical that you sit down with your financial adviser and tax consultant and work out a strategy that works for you and review that strategy yearly so that it is clear what tax liability might arise and adjust accordingly.


Got a burning tax question? E-mail mariette@hometimes.co.za  and we will be sure to assist you. 


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Who is Armando Small?

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Armando Small, tax specialist and owner of Capstone Group

Small is a certified tax adviser and owner of Capstone Group. His company provides a range of services from bookkeeping, audits and tax services to secretarial and trust services. He is a self-proclaimed Jack-of-All-Trades who will admit that he is still not entirely sure of what he wants to do with his life. What he does know, however, is that he is not interested in taking employment; he wants to be an employer.

hometimes@pixelbaste.com

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3 COMMENTS
  • Elna van Onselen 6th December 2016

    Good evening. Pls be so kind as to advise me. I need to change my will. Have two sons. The oldest son does not have any contact with me. My youngest son is hardworking and always seek for the best. He have his own plumbing busness. The eldest is in Metro Police. I was advised to put all my money after death into an annuanity trust for each son. I totally agree to that. My only question, can it be possible that should my eldest son that refuse to have any conctact with me passed away before his annuaity start paying out, for the money to be placed over to my younger son. The reason for this is that my eldest son is in a relationship with a girl that prevent him having contact with myself or his brother. I don’t want my money to go to her or the dad from wish I’m divorced for almost 24 years .I worked hard for my money and don’t want it to end up in wrong hands. My financial advisor informed me should my eldest son pass away before age 55, the money that I left behind in annauity will go to someone of his choice. Pls advse me as I can’t think it must go to my ex husband or to a girl that keep my son from my family.There are no grand children at this stage.

    • Mariette Steynberg 7th December 2016

      Hi Elna,
      I am sorry to hear about the relationship difficulties with your eldest son.
      My initial impression and concern is that you will have very little say over your son’s money/money in an annuity belonging to him, even if it was donated by you.
      I’ve emailed you to clarify some questions and will then send the request for advice to one of our experts.
      Mariette

    • Mariette Steynberg 9th December 2016

      Hi Elna,
      You can read the response to your question here

      Kind regards,
      Mariette

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