FINANCE WELLNESS COACH: There’s a case for giving children an early inheritance
You may want to give surplus money to a child now if it will materially improve their life, but several considerations need careful assessment first.
Parents in their seventies with more money than they likely need may consider giving an early inheritance to their children in their forties. While such a transfer could significantly improve a child's financial situation, it requires careful consideration. For example, R1-million today could alter a child's life greatly, especially if they are dealing with a home loan, school fees, or retirement savings. However, if that same amount is received at age 65, it may simply be added to an investment portfolio.
The first step is to ensure that you genuinely have surplus capital. At age 70, there may still be 20 or even 30 years left for funding. Consider conducting a retirement cash-flow projection, stress-testing the plan for longevity, inflation, market fluctuations, and increased care costs. Once you are confident that there is genuinely surplus capital, you can proceed with giving it away.
Donations tax may apply when transferring assets or money to a child. This tax is levied at the same rate as estate duty and ranges from 20% to 25%, depending on the cumulative taxable donations exceeding R30-million. You can donate up to R150,000 per tax year without incurring donations tax, and a married couple could potentially transfer R300,000 annually.
Alternatively, you may consider loaning the money to your child as a tax-efficient option. Charging interest on the loan can also help clarify the arrangement and prevent it from being classified as a soft loan, thus avoiding donations tax.
When deciding how to distribute the inheritance among multiple children, consider the implications for fairness. If you have three children and give R1-million to one child, you should account for this in your will. The R1-million should be treated as an asset in your estate, and your will should specify whether the loan must be repaid, deducted from their inheritance, or forgiven. This is crucial, as parents and children may have differing views on fairness.
Ultimately, the decision to give an early inheritance should be based on your specific circumstances. It is not merely about minimizing tax but also about ensuring that significant gifts or loans are made at a time when they can make the most significant difference in your child's life. Document your decisions carefully, and consider seeking professional advice to help navigate this complex process.
Written by urgent.news from Daily Maverick's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
