Financial vehicle for supporting the elderly

[newby_investor]

So my brother and I are of the opinion that we need to start putting money aside in anticipation of having to support my parents in their retirement. They're approaching too-old-to-work and while they're not completely without pension savings, it's not enough at all.

Is there some kind of financial vehicle designed to do this, without attracting an unhelpful tax burden on either of us? We'd prefer to do it without their knowledge.

If anyone has any ideas or suggestions I'd be keen to hear.

 

[Speedster]

So my brother and I are of the opinion that we need to start putting money aside in anticipation of having to support my parents in their retirement. They're approaching too-old-to-work and while they're not completely without pension savings, it's not enough at all.

Is there some kind of financial vehicle designed to do this, without attracting an unhelpful tax burden on either of us? We'd prefer to do it without their knowledge.

If anyone has any ideas or suggestions I'd be keen to hear.

Trust.

 

[TofuMofu]

Trust.

You have more info? I'm also interested. Life wasn't kind to my parents so might also need to do something like this.

 

[koffiejunkie]

Do either of them have a TFSA? Depending on how much time you have, or rather, how far into the future you want to start drawing from it, that would be the easiest tax-friendly (to them, neutral to you) option.

Quick elevator pitch, in case you're not aware. Tax Free Savings Account allows you to deposit R36k per year, up to a lifetime limit of R500k. The money can either go into an interest bearing account, or (better) ETFs traded on the JSE. Capital gains and dividends paid in the account is exempt from tax.

If you need to start pulling from it relatively soon, i.e. in the next 5 years, it's probably better to use one of the bond funds. If you can afford to wait a bit longer, Absolutely put it all in a broadmarket equity fund - Ashburton 1200 seems to be sweet spot. That will grow the capital and also pay a quarterly dividend. Reinvest the dividends until they absolutely need to start drawing from it. At that point, the standard 4% yearly drawdown should provide a useful extra income stream. So far I know EasyEquities is still the best deal around.

Other than that, be aware that interest is exempt from tax up to R23,800 per year (R34,500 for over 65 year olds). If you can stick some money somewhere that gives 7% pa, R340k per person would be R23.8k tax free (or R492k after 65 for R34.5k tax free). After that, interest is added to their taxable income. I'm not sure what happens when you exceed these limits but have no income. Maybe someone with experience can comment.

 

[Speedster]

You have more info? I'm also interested. Life wasn't kind to my parents so might also need to do something like this.

I am trustee of a couple of trusts, so feel free to ask if you have specific questions.

Basically you can set one up for about R2000 (or R100 if you do the legwork yourself) and then you have the option to donate R100k per person per year. The R100k is spread across your total donations per year, after which you're liable for 20% donations tax.

My suggestion would be to add your parents, your siblings, your children and your siblings' children as capital and income beneficiaries. You could appoint yourself and your siblings as trustees and then you will need an independent trustee too (i.e. someone who isn't a beneficiary), which can be a trusted family friend or you could pay someone to perform the service. You technically also need an auditor, although I was able to register two trusts by simply attaching a letter to the application stating the trustees are financially capable and will fulfill with all the required tax obligations.

 

[RedViking]

Following.

My mom has zero retirement fund, investments or anything. Owns nothing. She's 60 and still working.

Once I can recover from this years crisis' I want to start putting something aside for her.

 

[newby_investor]

I am trustee of a couple of trusts, so feel free to ask if you have specific questions.

Basically you can set one up for about R2000 (or R100 if you do the legwork yourself) and then you have the option to donate R100k per person per year. The R100k is spread across your total donations per year, after which you're liable for 20% donations tax.

My suggestion would be to add your parents, your siblings, your children and your siblings' children as capital and income beneficiaries. You could appoint yourself and your siblings as trustees and then you will need an independent trustee too (i.e. someone who isn't a beneficiary), which can be a trusted family friend or you could pay someone to perform the service. You technically also need an auditor, although I was able to register two trusts by simply attaching a letter to the application stating the trustees are financially capable and will fulfill with all the required tax obligations.

My specific question would be, what do I get from a trust? Setting it up is a small thing, but are there ongoing admin costs? And I'm under the impression that SARS taxes them quite heavily. None of my siblings are yet in a position to be able to donate R100k per annum, maybe half that in my case and a bit less for my brother. The other two are barely scraping by.

 

[Speedster]

My specific question would be, what do I get from a trust? Setting it up is a small thing, but are there ongoing admin costs? And I'm under the impression that SARS taxes them quite heavily. None of my siblings are yet in a position to be able to donate R100k per annum, maybe half that in my case and a bit less for my brother. The other two are barely scraping by.

The trust is a separate legal entity so its assets are considered separate from yours. There are no ongoing admin costs. SARS does tax trusts heavily, but remember only profit is taxable. Also, there is the conduit principle which allows the trust to pay out any profits to any beneficiary and the profit is then taxed in the hands of the beneficiary at their marginal rate (which for your parents and or children will likely be zero).

On the other hand if all you want to do is pool funds to give to your parents I guess a simple bank account will suffice.

 

[newby_investor]

The trust is a separate legal entity so its assets are considered separate from yours. There are no ongoing admin costs. SARS does tax trusts heavily, but remember only profit is taxable. Also, there is the conduit principle which allows the trust to pay out any profits to any beneficiary and the profit is then taxed in the hands of the beneficiary at their marginal rate (which for your parents and or children will likely be zero).

On the other hand if all you want to do is pool funds to give to your parents I guess a simple bank account will suffice.

Thanks, that makes sense. Is there a dummies guide somewhere that I can read up?

Some other things that pop to my mind.

1. Do trusts have to file tax returns? (Unless you do these DIY, there will be fees involved, though a tax accountant isn't usually too expensive once or twice per year.)
2. Does the trust need to have its own bank account?
3. What's the difference between donating to a trust, then the trust distributing funds to a beneficiary, vs just donating straight to that beneficiary?
4. How is this money disbursed? Solely at the discretion of the trustees?

I have seen trusts used by some well-to-do families for their property, for inheritance purposes, I haven't seen them used for much else though.

I guess a related question is, at what point do my parents just become financial dependants? If they're living with me? What about if I'm paying their rent and buying groceries etc? Donations tax certainly can't apply in this case.

 

[Speedster]

Thanks, that makes sense. Is there a dummies guide somewhere that I can read up?

Some other things that pop to my mind.

1. Do trusts have to file tax returns? (Unless you do these DIY, there will be fees involved, though a tax accountant isn't usually too expensive once or twice per year.)
2. Does the trust need to have its own bank account?
3. What's the difference between donating to a trust, then the trust distributing funds to a beneficiary, vs just donating straight to that beneficiary?
4. How is this money disbursed? Solely at the discretion of the trustees?

I have seen trusts used by some well-to-do families for their property, for inheritance purposes, I haven't seen them used for much else though.

I guess a related question is, at what point do my parents just become financial dependants? If they're living with me? What about if I'm paying their rent and buying groceries etc? Donations tax certainly can't apply in this case.

I'm not aware of a dummies guide, but I'm pretty sure there'll be some decent intros available online.

1. Yes. Although this is very straight forward, especially if the trust isn't doing any trading / earning income.
2. It is much easier if it has an account dedicated to it. I simply use a capitec account in my name for the one trust, with a trustee resolution to this effect submitted to sars when they queried it.
3. Donating straight to the beneficiary puts it in their hands, donating to the trust it's under the control of the trustees. If your parents have financial discipline, or you're able to keep them away from a dedicated bank account you can donate directly to them.
4. Yes, it's what is known as a discretionary trust. The trust will have a number of beneficiaries who are candidates (either for income and / or for capital) but the trustees can decide to who, when and how much they wish to distribute.

I'm not sure what the test for financial dependence would be, but that is also certainly an option. They won't be able to be your dependents as well as your siblings' though, so you might need to consider that.

 

[newby_investor]

They won't be able to be your dependents as well as your siblings' though, so you might need to consider that.

A very good point, duly noted.

Thanks for the info, I think I need to do some more reading.