Investing for my son

[Nivec]

I am looking at putting away a small amount every month for my son who is currently a 1 year old. I am thinking of something like Satrix or a Unit Trust. Can these types of investments be put in his name, if so and with tax in mind what would be better, in his or my name?

This would ultimately be used for what he pleases but I hope I can convince him he does not need that fancy car but instead invest it further.

Thanks

 

[SauRoNZA]

I do believe you can do it in his name but not exactly sure what the implications of that would be.

How much do you want to put away every month?

 

[KleinBoontjie]

I use one eft in my name, with the plan to use it for both my kids. I actually had one investment in my 1st daughters name, but when the second one came, I thought it be easier to manage only one account, under my name. Just tripled the money I saved from the first investment and putting it in the new one. I might even split it up in two different investments in the future (you know, the "all your eggs in one basket" thing) And in the long run, there might be something left for me after they're finished with studies in the future.
The wife also has something going for them. Will ask her later what she recons.

 

[Hendrix]

Since your son is young, and I presume he'll only see this money once an adult, 100% equity exposure could be considered.
Don't worry too much about market ups and downs, over time equity should produce superior returns.
If it was me, I'd go the ETF route, I like Satrix RAFI, but this choice is all up to you and what you comfortable with.

Now regarding the option of putting it in his name, why not just keep it in yours? And surprise him one day when you hand over the money...a lot less hassle.

 

[HavocXphere]

You can push 100k per year his way before running into tax consequences.

http://www.sars.gov.za/FAQs/Pages/42.aspx

in his or my name?

You can put it in his name - until he is 18 you can sign everything (on his behalf as legal guardian/parent) and unless he throws a legal tantrum it'll stick. Personally I'd try to move as much of it into his name as possible - else the interest and capital gains etc hits you. Just remember if you put it in his name then he can take it at 18 years old an throw a party with it.

I'd go for Satrix & maybe some DBX trackers.

 

[SAdata]

If you put it in his name:

you have to consider the deeming provisions of s7 of the income tax act and corresponding sections in the 8th schedule for capital gains. Basically these sections say any income or capital gains that accrue to a minor child (<18 years old) from an event/asset/transaction whose ultimate funding was a donation from his parent (or a donation from another person to whom the parent also donated money (i.e. "indirect")) will accrue to the parent of the minor child

Essentially if you put R500 a month in Satrix or whatever this will mean you will have to include the dividends in your taxable income (not a huge deal as dividends are exempt anyways. I'm not sure if Satrix would accrue any interest (due to property stocks included within it) - again not a huge deal as you get R22800 interest exempt per year.)

If you sell the investment before he is 18 - you will include the capital gain in your income + pay tax.

Once he is 18 the minor child deeming provisions cease and he will be responsible for any tax consequences - nice as until he's working he can sell around R200k capital gains tax free (in todays money) until he hits the tax threshold (assuming no other income)

Also remember you are allowed to donate R100k per tax year tax free (100k cumulatively to anyone). I doubt you would be contributing more than that so it shouldnt be an issue.

If you do the investment in your name

There are no tax worries for 18 years - yay! (bear in mind tax changes a lot so what is the case now may be totally different in 10 years time)

When he is 18 and you want to give him the investment - you will have to donate it. A donation will cause a deemed disposal for CGT for you - so even thoough youre not selling the investment you would have to include the capital gain in your taxable income then (and be taxed @40% or whatever.) Then donate this to your son then - anything in excess of R100k (the current limit) will be taxed @ 20% in addition. Your son would then have the shares at a cost at the value then (not the original date) + the donations tax paid. If he were to immediately sell it he would make a 0 CG and pay no CGT

OVERALL

If you put it in your name there is less admin each year, but at the end of 18 years you will have to pay tax (at least CGT and maybe donations tax). If you put it in his name there is more admin, but at the end of 18 years you won't have to pay tax. You could also keep the investment in your name and pay him cash (no deemed CGT disposal - but then you have to pull a couple hundred k out of a hat. However, then you don't control this investment and then if he turns out to be a bastard child you can't use it as leverege Also if you ever need the money - he will have to donate it back to you

 

[Dolby]

Nice post SAData!

 

[saturnz]

you can try considering a trust where he is the sole beneficiary and you and someone else are the administrators

 

[Nivec]

Thanks for the advise everyone. So by the sounds of it, less tax will be paid overall if in his name, only concern it that's he is an idiot . Thanks again for the informative post SAdata.

 

[saturnz]

Thanks for the advise everyone. So by the sounds of it, less tax will be paid overall if in his name, only concern it that's he is an idiot . Thanks again for the informative post SAdata.

a trust will mitigate any idiot tendencies your son may have

 

[shogun]

a trust will mitigate any idiot tendencies your son may have

^ This. Look into trusts. This way you can make him a beneficiary, but prevent the inevitable stupid decision making that comes with youth.

 

[borga]

^ This. Look into trusts. This way you can make him a beneficiary, but prevent the inevitable stupid decision making that comes with youth.

A trust is taxed at 40% rate, and capital gains is included at 66.6% so you are looking at an effective rate of 26.64% vs 0-13.3% for an individual.

There may also be gift tax applicable if the trust gives your son money (I am not 100% sure about that )

 

[Nivec]

a trust will mitigate any idiot tendencies your son may have

Sadly for him, I am not at the level of Trust Funds, so he is not going to get to be a "Trust Fund Kid" .

These savings will hopefully go towards his first property or retirement savings and they are independent of savings for his education. Also want to start another investment in my name that will eventually form part of my estate when I kick the bucket, starting this early should allow compounded interest to work nicely. My goal is that he is a little less reliant on “The Man” than I am.

 

[vash87]

Another thing to possibly consider:

R20 000 deposited into a retirement annuity and left to grow at 12% per annum until he's 60 will amount to just under R23 million which is free of CGT and income tax on interest earned.

A more impressive example is R20k lump sum with 15% interest on average per annum saved until he's 65 it works out to R278 million. The equivalent of about R6 million today if we assume inflation of 6%. His lump sum would be taxed via retirement fund lump sum tables and annuity income via his marginal tax rate, but that doesn't stop me wishing my parents could've done something similar for me.

Money in an RA is also protected from any future creditors he or might have.

 

[HavocXphere]

hmm good points by SAdata there.

Trusts are a little dicey in terms of tax. I'd also stay clear of an RA tbh because they derive their main benefit from being tax deductible.

 

[supersunbird]

Look at the Satrix Equally Weighted Top 40 unit trust:

http://www.satrix.co.za/fund-research-product.php?type=UT&fund=satrixEquallyWeightedTop40

I'm investing/saving in there for the ex-gf's daughter.

I like it because only each company only has 2.5% part in it.

 

[vash87]

Not qualifying for the tax rebate on a small lump sum into an RA wouldn't be the end of the world.

 

[supersunbird]

Not qualifying for the tax rebate on a small lump sum into an RA wouldn't be the end of the world.

Think it would be possible to get an RA for a under 18yo?

I like the idea.

 

[HavocXphere]

Not qualifying for the tax rebate on a small lump sum into an RA wouldn't be the end of the world.

Sure - looking at return percentages its what makes an RA worthwhile though. Naturally the smaller the investment the smaller the savings/loss/return but thats beside the point imo.

 

[Nivec]

I like the idea of an RA, if it is avaiable to under 18 year olds then it could potentially make his retirment a lot easier.

Thanks for the sums vash, going to look into it.