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I’ve come into some money and wonder if the best thing to do for my four-year-old son is put R500,000 into a unit trust in his name now, or open a unit trust in my own name with the intention of giving it to him when he’s older (say, 21)?  And do I feed the money into a unit trust over time, bearing in mind that I might have to pay donations tax if I invest it all at once?

— Maria Kruger


First, a donation of R100,000 per annum does not attract donations tax, and capital gains tax (CGT) and estate duty are for the parent if the unit trust is in the parent’s name. The same would apply to the child if it is in the child’s name.

Maria should put it in her own name as a lump sum in a unit trust, and make special mention of it in her will for her son to inherit through a testamentary trust. There will be CGT and estate duty implications; however, this protects the minor until age 21. Having the unit trust in the child’s name allows access from age 18 — which means the funds may be utilised incorrectly if left to the child’s discretion.

Feeding the funds on a monthly basis, though more tax efficient and better in terms of buying units at different pricing, might mean that the entire amount is not invested for the child. Life tends to happen, as we know.

In addition, an endowment may be a better vehicle for succession and tax implications.

An endowment is an investment for  five years or longer under a life licence, whereas a unit trust is an accessible investment subject to collective investment scheme rules. Unit trusts are also subject to CGT and interest tax.

In general, endowment fees are higher than collective unit trust investments, so it is advisable that endowments be used for a longer term than the minimum five years.

There are, however, endowment products available with competitive fee structures — subject to certain conditions, such as an initial lump-sum investment — making the endowment far more appealing over a five-year term. An endowment allows for a beneficiary. So even if it’s in the parent’s name a child can benefit. 

— Sheila-Ann Robey, financial adviser at Liberty

Send us your questions to yourmoney@fm.co.za


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