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.

My wife and I are in our seventies and have considerably more money than we are likely to spend. Our children are in their forties and could use the money now. Should we start giving them their inheritance now rather than waiting until we die?

If, say, your daughter is battling with a home loan, paying school fees or trying to save for retirement, R1-million today could materially change her financial life. The same R1-million inherited when she is 65 may simply be added to an investment portfolio.

So, if you genuinely have more than you are likely to need, there can be a strong argument for transferring some wealth while you are alive.

First make sure you really don’t need the money. This is the most important part of the exercise. At 70, you could still have another 20 or even 30 years to fund. Medical costs may rise, one spouse may require frail care, markets will have difficult periods and inflation will increase what you need to live on.

I would therefore start with a proper retirement cash-flow projection, stress-testing the plan for longevity, inflation, market falls and increased care costs. Only once you are comfortable that there is genuinely surplus capital should you start giving it away.

If you give assets or money to a child, it will trigger donations tax. This is levied at the same rate as estate duty, so you would pay 20%, increasing to 25% once cumulative taxable donations exceed R30-million.

You can donate up to R150,000 per tax year without donations tax being triggered. A married couple could therefore potentially transfer R300,000 a year, provided each donation is made from the respective spouse’s own assets.

Another tax-efficient option is to loan your child the money you want to give as a gift.

You should also consider charging interest on the loan. To be cautious, I would suggest using the official interest rate, which is generally the repo rate plus 1%. Although these rules mainly apply to certain loans involving trusts, charging interest also makes the arrangement between parent and child clearer and less likely to trigger donations tax by being classed as a soft loan.

Over time, you could also use your annual donations-tax exemption to reduce the loan balance. This allows you to help your child immediately while gradually converting part of the loan into a gift. Whatever you do, document it properly.

This is often more important than the tax. Suppose you have three children and give your daughter R1-million today to help with her bond. When you die, should she still receive one-third of your remaining estate? If your intention is ultimately to treat the children equally, the R1-million should be considered when drafting your will.

The same applies to a loan. If your daughter still owes you R1-million when you die, that loan forms an asset in your estate. Your will should make it clear whether the loan must be repaid, deducted from her inheritance or forgiven.

This is important, because parents and children may view fairness differently.