Could Having Too Much Money Create Problems For Your Kids? | Stangen

Nandipha certainly thinks so. She’s a single parent, has a great job at one of the banks, and owns a property or two.

Besides having a life most of us dream of, Nandipha also has her fair share of problems. Here, in no particular order, are her concerns:

  • She’s young
  • She’s single
  • She has two children younger than five, and
  • She’s got sizeable mortgage bonds on her properties

Nandipha has no immediate plans to get married. She has a feeling that if she passed away, her assets (which she wants to leave to her young children) might attract tax and costs by way of Capital Gains, Estate Duty, and Executors fees.

In this blog post, we look at the tax implications of being young, successful and a mother.

So, what’s wrong with being young?

A lot, when it comes to assets which increase in value over time.

Take, for instance, those properties she owns. Hopefully, the properties will grow in value over the next few years. After all, why buy a property if you don’t expect it to increase in value?

One of those was purchased for R500 000.

If that property went up in value every year at 10%, she’d be sitting on an asset worth R1 296, 871 ten years from now. Twenty years from now and that property could be worth R3 363, 749!

YEAR OPENING % ANNUAL GROWTH CLOSING
1 R500, 000 10% R550, 000
2 R550, 000 R605, 000
3 R605, 000 R665, 500
4 R665, 500 R732, 050
5 R732, 050 R805, 255
6 R805, 255 R885, 781
7 R885, 781 R974, 359
8 R974, 359 R1, 071, 794
9 R1, 071, 794 R1, 178, 974
10 R1, 178, 974 R1, 296, 871

What has that to do with Nandipha being young?

Nandipha is in her early 30s and should easily live for another fifty years. If those properties keep growing at 10% every year, they’re going to cost her a pretty bundle in the form of:

  • Capital Gains
  • Estate Duty, and
  • Executor’s fees

There is a solution but let’s move on to Nandipha’s next problem…

She is single

Why would being single be a problem?  Well, it has everything to do with two of the problems already mentioned:

  • Capital Gains tax, and
  • Estate Duty tax.

As long as you’re in a long-term relationship at the time of passing away, you’re mostly exempt from both. Well, as long as you leave all your assets to your surviving partner.

In Nandipha’s case, there’s no-one in her life besides her two children.

  • This means that all her assets will attract capital gains tax. Yes, the first R300 000 (in 2018) of any gain is excluded from tax but that won’t mean much if the capital gain runs into the millions.
  • When it comes to Estate Duty, the first R3.5 million of her net Estate is excluded from Estate duty while anything above that is taxed at 20%. If her assets less her liabilities are below R3.5 million then all is good, but what if her net Estate is worth R10 million or more?

She has two small children

Truth be told, if something happens to Nandipha, she’ll either have to rely on her children’s father or on her parents and siblings to look after her children.

Sure, they’ll make suitable guardians, but will they have the finances to give her children the life they deserve? Probably not.

Imagine for a moment, one of your siblings dumps their children on your porch for two weeks while they head off to Mauritius, all without offering you a cent? You’d quite likely flip!

Yes, Nandipha can set up a Testamentary Trust to take care of her children’s financial needs, but there needs to be finances in the first place. What’s a girl to do if she’s asset rich but cash poor?

She has large mortgages on all her properties

Join the club Nandipha!

Yip, it’s lovely owning the house you stay in and the spot at the coast, but don’t you just hate having to pay those bonds?

Besides paying off two bonds, Nandipha has to consider what will happen to her properties if she passes away. It makes absolutely no sense leaving the properties to her children when they have large bonds which need to be settled at death. If there’s no cash available to settle what she owes the bank, then they’ll sell off her properties leaving her children with nothing.

Is there a solution?

Take Nandipha’s first problem of being young. Owning assets in her personal name, and which increase in value over time would attract both capital gains tax and Estate duty:

  • Imagine for a moment that her capital gain is R5 million. This means that the amount which exceeds the R300 000 exclusion on death is R4.7 million. Add this to her taxable income in the year she passes away and consider her tax bill.
  • What if her net Estate is R10 million? R6.5 million of that exceeds the R3.5 million exclusion. Now tax that at 20%.

Her solution to both these problems is to own assets in a family trust.

This would ‘freeze’ the value of these assets in her Estate and protect these assets from her creditors since the trust is the owner. Because these assets are excluded from her Estate, she avoids having to pay Executor’s fees which can be substantial on such a large Estate.

Nandipha needs to be aware of the fact that trusts are in the spotlight, and tax amendments are on the cards. She will need professional advice before implementing a trust.

Regarding the problem of being single – being married has its advantages when it comes to tax.  Currently, all assets left to a spouse are free of both capital gains tax and Estate duty taxes. Should Nandipha not make use of her R3.5 million tax abatement, then this carries over to her spouse meaning R7 million tax-free is left to the children.

But one again, Nandipha needs sound advice. The Davis committee has recommended that this loophole be scrapped.

Regarding the problem of her two small children – Nandipha needs to set up a Testamentary Trust in her Will for the benefit of her two children or use her existing trust. The trust will take care of their financial needs until each of them turns 21. The easiest way to finance this is with life insurance, and lots of it.

She needs to speak to a financial advisor who will calculate how much she needs.

The problem of having a large mortgage bond means that the cheapest solution is life insurance for the amount owed.

Once again, a financial advisor could assist her with taking out life insurance.

There you have it – trusts and life insurance – two steps to making certain your children inherit every last cent.

Until next time.

The Wise About Life Team

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