What type of investment would be best suited for the following: We are six siblings and saving to assist our dad in his old age. We don’t want to put the savings into his savings account as there will be estate duty or tax on it should he pass before it is needed. We want to open an investment account with good returns over three to four years in all our names. What happens to the share of one sibling should they pass or to the investment in regards to their estate? We intend to save R9 000 per month. Please advise.
Thank you very much for your question. At the outset, I thought it would be best to first explain how estate duty works and make some assumptions with regard to your father’s position.
In terms of the Section 4A abatement, if the value of a person’s net estate is less than R3.5 million, then no estate duty is payable. In answering this question, we have assumed that your father has no spouse to bequeath his assets to. If he were to have a spouse surviving him, there would be no estate duty liability in his estate as his assets would be rolled over to his spouse free of estate duty in terms of Section 4(q) of the Estate Duty Act. As such, in your father’s scenario, we have assumed that his assets would be distributed to each of the six siblings in terms of his last will and testament. With there being no spouse to inherit, only the estate above the value of R3.5 million would be dutiable.
Assuming that the net value of your father’s estate is greater than R3.5 million, having an investment sitting outside of his estate would definitely help to reduce a potential estate duty expense in the event of his death.
However, please note that it is not possible for an investment to be held in the names of multiple people, making joint ownership of a unit trust impossible. This means that the investment vehicle used to save towards your father’s retirement would either need to be held in your father’s name or in the name of one of the siblings.
If held in your father’s name, each sibling can transfer their share of the R9 000 per month which your dad, in turn, can invest into his unit trust portfolio. Alternatively, you can each save your share of the R9 000 per month in your own name and when your father requires funds, you can each pay over the requisite amount.
Our advice would therefore be for each sibling to open a discretionary unit trust portfolio towards which you would each contribute R1 500 per month (totalling R9 000 per month). The funds for your father’s retirement will then accumulate in your own names.
It is not advisable to use a tax-free savings account for these purposes as you would effectively be limiting your own lifetime access to a tax-free savings account.
Further, the main benefit of a tax-free savings account is that you do not pay tax on interest earned, dividend tax or capital gain tax on the withdrawal and, in order to actually benefit from this, due to your annual abatements on interest and capital gains, you need to have earned more than R23 800 interest on the investment or withdrawn units in a tax year that have attracted more than R40 000 in gain.
Remember, if the investment is held in your own name, the investment will form part of your deceased estate should you pre-decease your father. You can specify in your will that this investment is bequeathed to your father, thereby ensuring that he will receive the funds intended for him.
With regards to risk and return in an investment, it is important to understand the time horizon in an investment. Typically speaking, the greater return you are looking to achieve, the more exposure you need to riskier asset classes like equity and property. For these types of investments, an investment time horizon of seven years or greater is typically advisable. The reason for this is that the probability of a riskier asset class returning low or even negative returns over the short term is a lot higher than lower-risk assets like cash and bonds. It is important to understand that no investment can guarantee good returns. The more guarantees you want, you lower risk assets you need to be exposed to.
I strongly recommend that you engage with your financial advisor to get a holistic overview of your father’s retirement plan to best advise what role the additional funds will play in his retirement so that more accurate advice can be given.