The new rules for income protection policies

With effect from the first of March 2015, new rules governing the tax treatment of premiums and proceeds from income protection policies came into effect. Here is a summary of the new rules and their implications.

Tax deductibility of premiums

Premiums you pay for income protection policies are no longer tax deductible if you are a "natural person" - that's "human being" in legal-speak. You will no longer receive contribution certificates for submission to SARS from your insurance company.

If your employer pays premiums on your behalf for Income Protection, which is common as part of group insurance or retirement funds, the premiums will be viewed as a fringe benefit and taxed as part of your income. That means less take-home pay.

Premiums paid by legal entities (E.g. companies) for company owned Overheads Protection policies will still be tax deductible for the company.

Taxation of income

If you claim on your income protection, the income you receive will be exempt from tax.

Proceeds of company owned Overheads Protection policies will still be taxable since the premiums are still tax deductible.

Cover Limits

Limits on the amount of cover you can claim on have always applied in the past. These may change under the new regulations. Insurance companies have different ways of applying limits so there is no general rule to work with. Here is an example of how Momentum has adjusted the way it applies the cover limits:

Before the changes

You could claim 100% of your before-tax income for two years and thereafter, 75% of your before-tax income. (inflation adjustments would be allowed).

So if you earned R10 000 per month, you could have cover of R10 000 for two years of a claim, which would reduce to R7500 after two years.

After the changes

You could claim 100% of your after-tax income for two years and thereafter, 75% of your after-tax income. (inflation adjustments would be allowed). The standard tax tables would be applied to determine the after-tax income. If your circumstances are such that this would not be practical, various workarounds are in place to ensure fair cover is offered.

So if you earned R10 000 per month, you could have cover of R8874 (Net salary using 2015 tax table) for two years of a claim, which would reduce to R6655 after two years. These proceeds would not be taxed.

Implications for clients

If you were insured to the maximum limits before 1 March 2015, you are probably over-insured under the new rules. Momentum has said it will honour claims for clients who are now over-insured because of the rule change, but will apply the limits to all new applications. When you next review your portfolio, you should check whether your cover should be adjusted in line with your needs and the limits now in place.

If you were under-insured, you are likely to be in a better position than you were in February.

It is not an urgent matter as you can expect fair treatment by your insurance company, but it is a good idea to check your cover levels when you next review your insurance policy with your professional advisor.

The above is not intended as advice - you should seek advice from your professional advisor before taking action.

Do you need a “special trust” for your child with autism?

Part of a life-long care plan is providing sufficient funds to cover the costs of your child’s long term needs after you have passed on

What happens when you are no longer here to see that these funds are properly looked after?

Probably the best approach to meeting this need is to establish a trust for the benefit of your child.

A trust is an agreement between the founder of the trust (you), and trustees (persons you select) to manage money or other assets on behalf of your autistic child.

When the persons for whom a trust is established are regarded by the South African Receiver of Revenue (SARS) as being disabled in terms of their definition, the trust is called a “special trust”, and is given special tax status.

This means that the income of the trust is taxed according to the standard tax tables for individuals. Lower incomes are taxed 18% and this rate of taxation increases in stages as income increases then eventually reaches a maximum of 40%.  A trust that is not a special trust pays tax at 40% from the first Rand it earns, so special trusts enjoy a significant reduction in tax.

A special trust can be established while you are still alive or it can be written into your will so that it is founded when you die. The choice will depend on quite a number of issues. Here are some to think about”

Cost

The cost of establishing a trust while you are alive would be around R5500 at this point in time. SARS regards a trust as a “taxpayer”, so you need to submit annual tax returns. If you will use professional services to do this, that may cost you yearly fees. The cost of drafting a Will that includes provision for a special trust is as little as R300.

Where you make use of professional trustees, they charge fees in proportion to the value of the funds under management with a minimum charge of around R8550 per year. This means that if you have only small amounts to invest, the costs may erode your capital. These costs can be reduced by various means if you feel the trust is important but you would prefer to avoid the administration costs during your lifetime.

Continuity

One big advantage in favour of establishing the special trust while you are alive is that funds in the trust are available immediately in the event you die, which means it is more likely that your child will experience as much continuity, stability and routine as possible at a time when rather a lot of disruption is inevitable.

A much longer list of reasons could be produced, but for the sake of space, a rule of thumb is that where the support network around your autistic child is not very extensive and dependable, setting up a trust while you are alive would be the more prudent choice.

I would be very interested to hear your questions about this topic or any suggestions about other topics I could write on that would be useful to you. Please feel free to comment on this blog or post questions on the Facebook page.

Your child’s “life-long care plan”

Every parent should have a Life-long care plan for their special needs child. This should consider the needs of that child at various life-stages and in various scenarios. Their financial plan should reflect their care plan so that they can afford to meet the costs of care at each stage.

The high level of uncertainty that most parents face often results in a complete lack of planning. And the lack of planning causes an on-going sense of unease about the future. Creating a basic framework of a plan gives a sense of direction and enables appropriate financial planning.

The care plan asks the question: “What needs must be provided for at this life-stage?” The financial plan asks the questions: “How do I provide funds to meet the cost of this need?”

We like to suggest that your planning is recorded in three separate documents that together form the greater plan, these are:

• Your Will: A legally binding document that ensures your assets are transferred according to your wishes and covers important issues like guardianship of your child.
• A Special Trust: This is a structure that ensures that the funds you have provided are managed properly and used in the way you intended.
• A Care-Journal: This is an unofficial document that explains to your chosen guardians and trustees the nitty-gritty of your plan and provides detailed information on the specific needs of your child and how to care for that child most effectively. It may include information about the child’s likes and dislikes, their social needs, how best to address certain behaviours. This helps a great deal with transition in the event that a guardian must take over care of your child.

If you should consult with us, we would start by understanding your unique situation and your child’s needs in all areas presently as well as over time. With that as background, we’ll look at your financial situation and develop a proposal that will help you make financial provision for your child during your lifetime and when you die. That plan will include a Will, Special Trust (either set up now or as part of your will) and a template to help you prepare the care-journal.

We will prepare complete financial needs analysis in the process of working on your plan because your child’s life-long care plan forms part of your overall personal financial planning and cannot be done in isolation. We ask you to provide full details of your financial situation in the process of working on your plan.

Our experience with special needs helps us provide meaningful, relevant advice and solutions that address the unique problems of the South African legal and financial environment.