Ask a Tax Man – Retired, why you should donate to your children
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
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.
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 email@example.com and we will be sure to assist you.
Who is Armando Small?
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.