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How to protect your child, should you pass away, and other readers’ questions answered.
1. What account will protect my child’s earnings?
Q: My eight-year-old child is going to start taking part in photo shoots and will therefore earn an income. I would like to protect his income until he is 18, and, if possible, earn some interest on his hard-earned cash as well. Is there an account from which a child can withdraw money on or after his/her 18th birthday or when they are legally emancipated?
A: You could open a tax-free savings account in his name, but, as you’ll be the signatory, only you could transact on the account. This would ensure that any growth on the investment is not taxable once he starts earning sufficient money to pay tax. Keep in mind that once he turns 18, this becomes his account and he can do what he wants with it. If you want more discipline, an endowment policy locks you in for a period of time, for example, five years, but it is not tax efficient for someone who doesn’t pay tax and usually has higher costs. You could open a retirement annuity for him, but then the money is earmarked purely for his retirement – it’s a great compounding return over such a long time, but the money will not be available until he turns 55.
2. How do I protect my daughter should I pass away?
Q: I have an investment in my name only and I am married traditionally. I want my investment to look after my daughter in times of need, should I die. I have recently had a will drawn up to protect my house, but is this enough to protect my daughter, or do I need to create a trust?
A: It is best to get advice about the will, as your marriage regime could have implications on your estate. In terms of a traditional marriage, if you were married before 1998, you are considered to be married out of community of property. If you married after 1998, you are married in community of property. If you are married in community of property, half your estate legally belongs to your spouse. You could leave the other half to your daughter, or take out life cover that is paid to her. But who will look after that money if she is still a child? If you have a retirement fund, you could stipulate that the benefits be paid to a beneficiary fund, which then looks after the money and provides a monthly income for the child until she reaches the age of 18. However, this does not cater for non-retirement assets such as an investment.
For other investments, you could create a testamentary trust which comes into effect on your death. However, this could be expensive as it requires the professional services of trustees and is only recommended for an estate of R1 million or more. An alternative is an umbrella trust fund.
Fairheads Benefit Services has developed a structure to house smaller benefits in an umbrella trust arrangement, called the Fairheads Legacy Trust. The legacy trust is an umbrella trust arrangement whereby a single trust deed caters for the running of the trust and the benefits of scale can be made available to all beneficiaries. This makes it more cost effective. The trust would use the funds from your estate to pay your daughter’s expenses, as stipulated in your will, taking affordability into account. David Hurford, director of marketing and consulting at Fairheads, says there are two issues to think about before making use of the legacy trust:
- It should be considered only under the advice of an estate planner or other qualified adviser; and
- Although the legacy trust is more cost effective than a standalone trust, one still needs to have a minimum estate value of around R50 000 for it to be viable. If you decide to use the legacy trust for your child you will need to stipulate this in your will and also nominate the trust as the beneficiary on the life policy.
3. Home loan or student loan?
Q: Which is more cost effective, to pay for my child’s university from my access bond or to take out a student loan?
A: Student loans can be very cost effective and, in most cases, you would be paying around the prime interest rate, which is similar to what you are paying on your access bond. There are additional reasons you may consider a student loan:
1. It allows your child to take some responsibility for their education. You can tell your child that you will service the interest, but that they will have to pay the capital once they start working. This makes them place value on their studying, rather than its being a freebie from their parents. They share the financial burden of an education that they will benefit from, while you can focus on planning for your retirement.
2. It helps them build up a credit record in a safe way. This does depend on the bank, as some banks issue the student loan in the child’s name. Others issue the loan in the parent’s name, unless the child is working full time. An ideal option is where the child has the student loan in their name and the parents have signed surety. This allows the child to build up a credit history.
3. You can spread the repayment with a student loan. With an access bond, the capital/principal debt and interest form part of the repayments from the first month. In the case of a student loan, only interest must be paid during the course of study and the repayments of the capital/principal debt must begin within six to 12 months of studying coming to an end. The loan must be fully repaid within four to five years. With a student loan, most banks offer a six-month grace period to find work, but this can be extended to up to 12 months, as long as interest on the loan has been serviced. If the student is required to complete articles, an internship programme or community service, proof must be supplied to the bank. During the period of internship, articles or community service, interest must be serviced on the loan.
4. With a student loan, as a parent you can decide whether you want to just pay the interest, or whether you repay both the interest and capital.
5. If you pay with an access bond, you have to ensure that you still repay it within the time period of the studies. If you only pay it off over the 20-year period of the home loan, it will become a very expensive education as the total interest paid will be far higher.
