Endowments and Investments: Financial Planning for Incarcerated Adults

But this is a person who's got a family member who's in prison and the person will be there for about five or six years .

And so the question we've received is the family would like to kind of set some money aside into an investment that will be able to grow for the next five or six years and then help their family member when that person comes out of prison . Now you know , I mean , what a tough situation for the family .

You know you've got someone , you know that's been put away literally and you know will have a tough time when they come out , and so I think you know that's maybe a little bit of a unique situation for a lot of us .

You know we won't have a family member in prison , but a lot of us will have adult family members that are in a financial hardship , and if we're in a position to help them , we would all like to do that , and if we're in a position to help them , we would all like to do that , and so if you've got that same sort of requirement where you're wanting to

look at how you can help a family , an adult family member and I'm saying an adult family member because you know , saving for your own children is a different story but when you're saving for a cousin or a brother or you know your own parent or something like that , your tax requirements are a little bit more tricky and control is a very different thing .

When you've got an eight-year-old child or anybody under 18 , you can make the decisions on behalf of your child . But when you're helping an adult , once you open an account for them in their name , what you need to understand is it's their money and they have control of that money and you can't do much about it other than talk to them .

You don't have a lot of legal control . So I think that that's the first comment I want to make is you need to decide , when you're helping an adult family member or even a friend , how much control do you want them to have over the money while you're busy saving it and investing it for them ?

So if you want the money to be there for them , but you don't want them to have control in the short term , then you can't put it in their name and you can't put it into something that's easily accessible for them .

So you need to be careful now because , for example , you can start an exchange-traded fund or a unit trust and if you open it in your name and you set aside some money and you let it grow , what you need to know is that when you decide in five or six years' time to take the money out of that investment and give it to the person , you've got two sets

of of of questions or taxes which which might hurt you . The first one is that you know any investment in your name if you leave it for a period of time . So if you buy unit trust and you leave it there for three years or five years and it's grown , you're going to be exposed to capital gains tax .

And just just to remember that , if you put in 100 rand and it grows to 1,000 rand over a five-year period , well , that would be an amazing investment . But just to make the math simple , let's use that you know .

Use the example you put in 100 , grows to 1,000 , then the capital gain is 900 rand and so you're potentially exposed to capital gains tax on that growth . You're potentially exposed to capital gains tax on that growth . Now , in a year , you're allowed to generate 40,000 rands worth of growth , worth of profit , before you start paying capital gains .

So that's an important thing to know that you know if you're going to do something on behalf of a family member and it's an adult , they're a taxpayer and you're a taxpayer , then you need to know that you're potentially doing something in your own name for them could cost you some tax .

So one of the things you could do is you could you know let's say it's you and your spouse , or you know you and your other cousins or something like that you could each set aside some money into a unit trust and then each benefit from that 40,000 rands with the growth allowance that you're allowed to generate .

So you are able to kind of find a way to cut that capital gains tax down and potentially make it not an event in your lives . It will depend on how much money that you're setting aside . So that's the first thing .

The second thing is when you give that money to the person , you need to know that one adult giving another adult money if it's not a financial dependent of yours so if it's not your child or your parents who are financially dependent on you , then you need to know that that's called a donation and even though you're doing a good thing , sars looks at that and

says that's a donation . Now you are allowed to donate 100,000 Rand every year to somebody without paying donations tax . If you donate more than that , then you're going to be exposed to donations tax , and that could be somewhere between 20 or 25 percent , if I remember correctly , and so just understand that again .

You know if it's going to be a large sum of money , that donations tax is going to be an issue , and then you might want to spread that donations you know kind of tax between a few of you and maybe get that to zero or very little .

So if you want control , if you're worried about the person not being responsible with the money when they come out of their five or six-year term , you might want to then do the investment in your own name .

If you're not worried about that , if you think that the person is financially responsible , then perhaps you should consider opening an endowment in that person's name .

In other words , start an account in their name , use a unit trust company that offers endowments and open the endowment in the person's name and when they come out of prison and they're able to access their money in five or six years' time , the bulk of that money will be all of it if it's after five years will be tax-free for them .

So that might be a good option and in the meantime you could make them the owner of the account but you make yourself the beneficiary , so that if something happens to that person and they die , the money will be paid to you . So then at least you can decide what to do with it in the future , and that might be a good kind of a second option .

There are some other kind of more complicated and expensive things . So , for example , you could start a trust you know if you're really worried about the person you know and the way that they deal with money as well .

But trusts are expensive and there's quite a lot of admin involved and tax wise they're not the most tax efficient investment vehicles you'll find for moving money from one generation or one person to the next .

So you need to decide on kind of control first and then you decide on what you want to do with the money thereafter when you actually make the investment decision . I think if you've got a term of five years or longer , you can invest the bulk of the money into shares .

So , for example , you could choose a balanced unit trust or a combination of index tracking funds that have a large exposure to the stock market . Equally , you could actually invest 100% of that money in the stock market .

So you could choose an all-share index in South Africa tracker or a general equity unit trust and maybe half in that and then half in a global equity fund if you wanted to either a global equity tracker or a global equity unit trust . So you can choose largely shares because your time horizon is long enough .

If your time horizon for the person was only one or two years , then you would look at a money market fund only , but longer term you can take more risk . So those would be the kind of general suggestions for investing for an adult family member or a friend , and I hope that it all goes well with that person and I wish you all the best .

Thank you so much for your question .