Investment Options for Your Children
Many couples ask us about investing on behalf of their children or grandchildren. Children can be gifted with money when they are born, or parents may choose to put aside funds for their education or future needs at an early age. Whatever the reason, there are several options and each of these options needs to be explored in detail to ensure it provides you with the most suitable outcome.
The first consideration is who should “own” the investment? The options are to put the investment in the child’s name or to be held in the adult’s name “as trustee for” the child. This creates an informal trust arrangement. Alternatively, a formal trust such as a family trust may be used. There are some tax considerations with ownership and we would highly recommend you seek tax advice in this regard. When investing for a child there are a number of factors to determine whether the income will be taxed in the hands of the child or adult. Generally, income earned by minors is taxed at a special minor tax rate that is higher than adult rates. There are some circumstances where minors can receive an exception to this rule (again, seek tax advice).
So, once you have the ownership sorted, what will you invest in? Just like any other investment decision you should be looking at the purpose of the investment and the time frame as well as the level or risk you are prepared to take and the level of control you want over the investment. Here we list a few common investment options:
Cash accounts – by far the most common is a bank account. Online banking, term deposits etc. Mum and dad can open an account, make regular or one-off deposits and the interest earned is included in the parent’s tax return.
Direct Shares – again, generally in the name of mum and dad an online trading account can be opened and you can invest in Australian companies. The advantages include higher growth potential than cash, tax effective income if the company pays franking credits however you may have limited diversification and all investments require monitoring.
Managed Funds – an adult must own this investment. Managed funds provide access to professional management, greater diversification, higher long-term growth expectations than cash however higher investment risk.
Insurance Bonds – these are coming back into vogue at the moment and suit families with high income earners. The account is owned in the adult’s name but many have a vesting age where the ownership can pass to the child at a specified age without triggering a capital gains tax event. Investment bonds ideally should be held for 10 years and have certain rules that apply each year however they provide a unique way to access managed funds and growth investments. Products can vary greatly so professional advice will be necessary.
Additional Mortgage payments – rather than using a stand-alone bank account you may like to make additional mortgage payments and redraw the money when it is required (perhaps for education funding). Offset and redraw facilities can be used to provide a risk free and tax-free strategy however this requires strict discipline as there is no account balance to keep track of and there is no return to be credited to the account, it’s more a saving of interest.
As with all investment decisions, professional advice should be sought to ensure you have considered all the advantages and disadvantages as they apply to you.
This information contained in this document has been provided as general advice only. The contents of this document have been prepared without taking account of your personal objectives, financial situation or needs. You should, before making any decision regarding any information, strategies or products mentioned in this document, consult with your GPS Wealth Ltd financial adviser to consider whether it is appropriate having regard to your own objectives, financial situation and needs.