The desire to provide for your children’s future is deeply ingrained. For those who have diligently accumulated more than enough wealth to secure their retirement, transferring money to their adult children becomes a significant consideration. Whether offering support during the parents’ lifetime or as an inheritance is a complex decision, entailing financial, emotional, and practical aspects; in this blog, we delve into the nuances of transferring wealth to adult children, weighing the benefits of early support against posthumous distribution, while also addressing tax implications and prudent strategies.
Supporting Early in Life: Benefits and Considerations
Research consistently highlights the advantages of providing financial assistance to adult children earlier. This approach empowers them to make crucial life decisions with more financial stability, which can have a lasting positive impact. When parents assist their children financially during their adult years, several benefits emerge:
Accelerated Financial Goals: Early financial support enables adult children to purchase property, reduce debt, and rapidly establish savings. These actions lay a solid foundation for their long-term financial well-being.
Reduced Pressure: Children can better manage the financial demands of raising their own families by receiving assistance in the early stages of adulthood. This, in turn, allows for a more comfortable lifestyle without excessive stress.
Legacy Building: Parents can witness the positive outcomes of their assistance firsthand, creating a legacy of support that can inspire future generations.
Enhanced Retirement Planning: With a more robust financial foundation, adult children can start planning for their retirement earlier and with greater confidence.
Tax Implications: A Crucial Aspect
Understanding the tax implications of wealth transfer is essential for making informed decisions. When transferring money to adult children, both givers and receivers should consider potential tax obligations and plan accordingly. Depending on the jurisdiction and the specific circumstances, donations tax (gift tax) or inheritance tax might apply.
In South Africa, Donations Tax is charged at 20% of the value of donations up to R30m. For amounts over R30m, the tax rate is 25%. This is aligned with Estate Duty, which is levied at a rate of 20% on the first R30 million and 25% on the dutiable value of the estate above R30 million.
That means the decision to donate money to adult children during your lifetime or to leave it to them on your death should not be heavily influenced by tax considerations. The only significant tax consideration is that you can donate up to R100,000 annually without paying Donations Tax. This is worth doing as early as possible as it will reduce your estate size if you can make donations tax-free for several years before your death. Grandparents are also allowed to pay for their grandchildren’s schooling as a form of maintenance without incurring Donations Tax; this is another way of supporting your family tax-efficiently.
Transferring Wealth at Death: Testamentary Trusts
For parents concerned about the financial responsibility of their adult children, establishing a testamentary trust can be a viable option. This trust, outlined in a will, safeguards assets designated for educating grandchildren or caring for special needs children who cannot independently manage their affairs. This approach offers several benefits:
Controlled Distribution: Testamentary trusts allow parents to specify how assets are distributed and used, ensuring their wishes are upheld even after their death.
Protection for Special Needs: Children with special needs due to physical or mental incapacities require specialised care. A testamentary trust ensures they are financially supported and cared for as parents intended.
Retirement Funds: Nominating Beneficiaries
In retirement funds, parents can expedite the wealth transfer by nominating beneficiaries for their living annuities. This strategy ensures that adult children receive the benefits without waiting for the estate to be settled. There is also a significant tax saving as retirement funds are inherited free of Estate Duty and Executor’s fees.
Ultimately, the choice between early support and posthumous distribution is deeply personal and depends on individual circumstances. Regardless of the path chosen, a thoughtful approach that balances financial responsibility with personal values will pave the way for a smoother wealth transfer journey.
Written by Warren Ingram
CFP®, Wealth Manager, public speaker and author. Host of the HonestMoney podcast. FPI South Africa Financial Planner of the Year 2011.