THE FINANCIAL WELLNESS COACH: Three effective strategies for passing wealth to your grandchildren
An inheritance can be structured in several ways, but tax, costs and control differ sharply.
When it comes to providing your grandchildren with a passive income, there are several options to consider. Each of these options has its own tax, cost, and control implications.
Option 1, setting up a family trust, can be effective for control and protection. The trust deed can outline how the money should be used, covering costs such as school fees or a home. However, trusts can be expensive, with continuing legal, accounting, and trustee costs. Additionally, they are taxed at high rates if income or gains are retained in them. Transferring R10-million into such a trust might also incur donations tax or require careful management of any loans.
Option 2, donating the money directly to the grandchildren, allows for immediate support for education costs or annual assistance. The annual exemption permits donations of R150,000 per year without donations tax. A couple could potentially donate R300,000 annually without incurring donations tax, but this is a slow method of transferring the entire R10-million. Spouses have a separate annual exemption, which could further reduce taxable donations.
Option 3 involves using retirement funds to create an income stream. If you are at least 55 years old, consider contributing some or all of the R10-million to a retirement annuity and then transitioning it into a living annuity. One significant tax advantage is that the deduction for retirement fund contributions is limited to 27.5% of your qualifying remuneration or taxable income, subject to an annual maximum of R430,000.
Any excess contributions can be carried forward for future use. Once transferred to a living annuity, disallowed contributions can be set off against annuity income, potentially resulting in tax-free income for the grandchildren. This option also allows you to retain control over the capital while alive, as you decide the income drawn from the living annuity and how much is passed on to the grandchildren each year.
Furthermore, estate planning benefits include nominating the grandchildren as beneficiaries, avoiding estate duty if they continue the annuity, though this income will be taxable in their hands.
Written by urgent.news from Daily Maverick's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
