By Jonathan Theunissen, CFP ®

Investing on behalf of your children is a thoughtful and generous act that can enable future opportunities for them. It goes beyond simply setting aside money; it involves strategic planning and an understanding of the legal and financial landscapes. By starting early, you can take advantage of compounding growth, potentially transforming modest contributions into substantial funds that can support your child’s education, first home, or other significant life milestones. This forward-thinking approach not only provides financial security but also instils valuable lessons about money management and the importance of long-term planning.

In this article, we will explore the legal responsibilities of parents and guardians, the various investment options available, and the tax implications associated with investing for your children. By equipping yourself with this knowledge, you can make informed decisions that will benefit your child’s future.

Understanding the Law

According to the Children’s Act, a “child” means a person under the age of 18 years. As a parent or guardian, it is your legal responsibility is to administer and safeguard your child’s property and property interests and assist or represent your child in contractual and other legal matters.

In terms of Common Law, children below age 7 have no capacity to act; children aged 7 to 18 years old have limited capacity to act and can enter into contracts with a parent or guardian’s assistance/consent. There are two exceptions to this, where a minor may enter into a binding contract without the assistance of his or her parent/guardian:

• Where legislation prescribes another age. For example, the Wills Act, which states that a minor, aged 16+ years may execute a will, and a minor, aged 14+ may witness a will.

• If the contract imposes rights, but no obligations. For example, to accept a beneficiary nomination or a donation.

This means that a child cannot open or transact within an investment account without a parent’s or guardian’s assistance. The parent or guardian must sign all forms on the child’s behalf. No one else can open an investment account in a child’s name without the consent of the parent or guardian. If a child has two parents or guardians, either one can open and manage the investment account without needing the consent of the other.

Investment Options

Children are able to invest in a range of products. It is important to consider the pros and cons of each. A product that provides benefits to an adult might not be suitable for a child. In fact, what are advantages to tax-paying adults are disadvantages to non-income earning children. Some of the more common investment vehicles are listed below, along with advantages and disadvantages.

Tax Implications

Each parent is entitled to donate up to R100,000 per tax year. Anything above this amount will trigger donations tax at a rate of 20% of the amount under R30m and 25% of any amount over R30m. It is important to understand that the donations allowance is per person donating, per year, and not per person being donated to.

If you donate money to your children, to invest, the income and capital gains from the investment is taxed in your hands while your child is a minor. To be clear, parents or guardians must include income and capital gains from investments funded by a donation to their children in their own tax return.

The tax situation differs for children regarding donations from individuals other than their parents. Children are eligible for paying tax on income generated from money they inherit or receive as gifts from anyone other than their parents, such as grandparents. This means the child, not the donor, is liable for tax on interest, dividends, and capital gains. If your children’s taxable income reaches a level that makes them liable for tax, you must register them for income tax and submit a return on their behalf.

What happens when the child turns 18 years old?

When a child turns 18 they become an adult in terms of South African law and will have full access to investments in their name. At the same time, the parents lose transactional rights to their child’s investment. For parents to retain rights to investments made in their child’s name, they need to either withdraw the investment in full or transfer it to their name before the child’s 18th birthday. Depending on how the money is invested, this might trigger capital gains tax.

If your adult child would like you to continue managing their investment, they will need to provide the investment manager with written authorisation for you to act on their behalf. If your child is happy to manage the investments, all they need to do is provide the investment manager with any required documents.

When your child turns 18, you will no longer be liable for the income and capital gains earned from investments you have made on their behalf. Your child will now be required to complete their own tax return. 

Protecting young adults from themselves

We can do our best to teach our children about money and the value of compounding growth, but we know it’s not uncommon for young adults to make poor decisions. If you are particularly concerned about your child squandering the investment you’ve sacrificed to build for them, you should consider creating a separate account in your name or establishing an inter vivos trust to house the investment.

Conclusion

Investing on behalf of your children is a powerful way to secure their financial future and provide them with opportunities that may otherwise be out of reach. By understanding the legal frameworks, investment options, and tax implications, you can make informed decisions that best suit your family’s needs. As your child grows and eventually reaches adulthood, it is crucial to adapt your strategy and ensure a smooth transition of financial responsibility. Teaching your children about money management and considering protective measures, such as establishing a trust, can further safeguard their financial well-being. By taking these thoughtful steps, you are not only investing money but also investing in your child’s future success and stability.