Gulf News, 8 May 2010
10 May 2010
Gulf News: "Understanding Tax Laws is Necessary for Financial Gifts"
Q. I want to gift AED100,000 to my grandchild, who is 15 years old and lives here in Dubai. However, I am uncertain as to the best way to give it to him, can you please advise me.
Many grandparents decide that they want to help their grandchildren financially later in life – perhaps in saving for a wedding, buying a first home or setting up a business when they come of age. However, giving money can be much more complex than it first appears – especially for the larger amount you wish to give – and so needs some considerable thought.
It is important to understand, before you make any financial gifts to your grandchild, the tax laws of your resident country that such gifts may fall under. Many countries, especially in Europe and the US, operate a gift-tax system, which collects a percentage of the gift sum over a specified amount. In the US, for example, any cash gift more than $10,000 is taxable. However, you can get around these laws by spreading out your gift to more than one grandchild, or handing it over in smaller sums over a longer period of time.
Of course, the simplest way to give money as a gift is in the form of cash. There are no strings attached, and as long as it's less than the gift-tax limit in one year, there is no problem. In the UAE there is no income tax so this is not an issue you have to worry about either. However, in handing over cash, you also hand over control of what the money is spent on, and it could end up being wasted away by your 15 year old grandchild.
Alternatively, if you want the money to be invested and only made available at a certain time, and for a specific purpose, then you could place the money into a trust fund or an investment policy. Furthermore, if your permanent residency is in a country that has strict income and estate tax policies – that you want to avoid – the best option could be setting up an offshore bond with a lump sum.
Such bonds allow you to stipulate when the money can be drawn down, and ensures that you continue to see a return on the investment until the time the money is to be used. But remember, return is partly dependent on the length of time the money is invested, so the sooner you set up a fund, bond or policy, the better.
On the other hand, you may decide that you want the money to be spent on your grandchild’s future education with payments being drawn from a bond or fund from the age of 17/18 years, which is the usual age to start university level education. A policy provides you with the flexibility to either directly fund the fees, or to take a lump sum, which you can use however you wish to support your grandchild in reaching their career goals. As your grandchild is already 15 years old, the period to the start of university may be considered rather short for bond or fund investments, and care is needed here in order to make the right decision.
As with any financial decision, it is wise to consult with an Independent Financial Advisor before making any financial commitments. Once you have done so, you can feel confident and secure about helping your grandchildren monetarily.
Roy Gaunt, Chartered Insurance Broker, Sales Training Manager, Nexus Insurance Brokers.