Best Investment Strategy for Kids?

Llarndis on 27/04/2023 - 20:52

Hi OzB,

I'm looking for a tax-effective option to invest in the medium term for my three kids (9, 12 and 14). Hubby and I will be putting in $900 per month between the three of them. Ideally it will remain untouched until they need it, e.g. to buy a home.

One reason we haven't set anything up before now was we were paying off a home loan, but are fortunate to have recently become mortgage-free.

Another reason for not already having something in place is whenever I looked into it I got too confused trying to work out what was 'good'.

Obviously we are aiming for decent growth/returns as well as being tax-effective.

One option I'm interested in is a Vanguard Managed Fund (probably growth/emu), held in an informal trust for each child.

My understanding of this product is that while it is held in trust, we declare any income earned and therefore pay tax on that income. When the child turns 18, the account is no longer held in trust and ownership is transferred to them, however as it was originally purchased in their name no capital gains tax is payable on the transfer. Whenever they sell up/withdraw the funds, CGT would then be payable.

Is my understanding correct? Is this a good option? Are there better options?

Cheers

Financial Investment

Comments

    • JohnSy on 28/04/2023 - 09:41

      Great link. In particular this sentence is important for the OP to take note of. "Under bare bones trust offered by brokers, a parent can not lodge tax returns in their name and later pass the shares onto the beneficiary without CGT. You either lodge the annual tax returns in the child’s name and don’t claim CGT or you lodge annual tax return in the adults name and later incur CGT. Not both."

      And, If quoting a child's TFN, you would need to ensure their passive income remained below $416 annually to remain tax-free each year.

      Also: "Another problem is that shares count towards the Liquid Assets Test Waiting period (LATW) for Centrelink if transferred when they turn 18, so if they would otherwise be getting benefits like AusStudy, they may have to wait up to 13 weeks due to the LATW."

  • AustriaBargain on 27/04/2023 - 21:28
    +1

    Put it in your own super so they can inherit it when you die. If you've already hit the cap on your own super, put it in their super so their retirement is secure if they blow through their inheritance too fast.

    • larndis on 27/04/2023 - 21:36

      I'm in a defined benefit scheme, I already contribute the max. I want the money to be available before that anyway.

  • SmiTTy on 27/04/2023 - 23:02

    You can look at Insurance or education bonds, but yes maybe some sort of dollar cost average into a managed fund might be best.

    There's actually been plenty of discussion in the past on this topic … Do a search in the forums (or reddit)

  • boomramada on 27/04/2023 - 23:55
    +2

    Pay off your mortgage? Get a investment property? Put them in private school? Make sure they are educated or skilled?

  • TheMindsetTraveller on 28/04/2023 - 00:13

    Investment property - residential. KISS.

  • Bearlion on 28/04/2023 - 07:55
    +2

    Pay a financial advisor, won't get the best advice here!

    Make sure they go to a public school, private and religious schools are stealing your money, definitely not worth it.

    • boomramada on 28/04/2023 - 12:16

      public school, private and religious schools are stealing your money, definitely not worth it.

      that's debatable based on the area, city, town, government founding's and naplan score.
      Where I'm living, I'm favorable towards private.

      • Bearlion on 28/04/2023 - 13:17

        Yes very true, a wealthy suburb has good public school generally.

  • djkelly69 on 28/04/2023 - 08:20

    I have VDHG through Selfwealth for mine, as Selfwealth allows you to nominate that you are holding in trust for a child (so account name says something like 'John Smith ITF Jack Smith'). That one was a one-off purchase however, as brokerage fees would eat into it if you bought more every month.

    For ongoing contributions you could look at going direct through Vanguard or whatever other managed fund as most allow fee-free ongoing purchases, but as you mention trust setup would likely be less formal as I am not sure they allow a trustee to be nominated.

    • JohnSy on 28/04/2023 - 09:44

      I have the same. See my above post, and check which TFN selfwealth has stored against the account - it is likely the adults. I am in the process of changing mine to the childrens TFN now.

  • netjock on 28/04/2023 - 08:50

    Tax effective.

    Managed funds have to pass onto their earnings onto unit holders. Which means if you get over $416 a year in income there is going to be big tax to pay.

    Eligible income tax rate for kids
    $0 to $416 Nil
    $417 to $1,307 66% of excess over $416
    Over $1,307 45% of the entire amount of eligible income

    Most tax effective would actually be funds / investments that pay little or no income.

    Alternatively look at investment or educational bonds. Problem with these is it depends on how good the investments turn out.

    Never invest on the basis of tax benefits. Making a boat load of money and having a tax liability is actually a good thing.

    • larndis on 28/04/2023 - 20:39

      Not looking for tax benefits, but wanting to avoid getting slugged with unexpected or avoidable taxes.

  • benwaffle on 28/04/2023 - 09:09
    +2

    Minor trust account (Commsec or CMC)
    Buy AFI units
    You can buy up to $1000 of AFI once a day @ $0 brokerage with CMC
    Turn on DSSP so no dividends (no annual tax returns, no costs to transfer ownership when kids turn 18)
    Wait for compounding

    • Donaldhump on 28/04/2023 - 09:25

      how does your cost base change when using DSSP. Something must give if paying no tax on dividends.

      • benwaffle on 28/04/2023 - 09:43

        Changes the cost base which will change the CGT when units are eventually sold (ideally when recipient is on a low income which most kids are at 18)

      • JohnSy on 28/04/2023 - 09:50

        The bonus shares cost base is shown to be $0. So, you pay via capital gains instead.

    • netjock on 28/04/2023 - 11:26

      DSSP

      That is a good one. I forgot about that.

    • larndis on 28/04/2023 - 20:23

      Thanks, I'll take a look

  • ForkSnorter on 28/04/2023 - 09:31
    +3

    Most of the people in my extended family/network of acquaintances that I've seen growing up spoiled—whether through overly generous, overly tolerant wealthy parents or wealthy young spouses—have turned out to be financially irresponsible, self-centred/selfish, even trouble makers.

    My advice is to encourage your kids to be independent and self-reliant from a young age. Don't give them a financial rock of stability that they will become accustomed to relying upon. When it disappears one day, they will seek to rely on somebody else. Or maybe they will grow up super-wealthy using your money, and develop an irrationally large ego like Donald Trump as they pretend to themselves that they're wealthy because of their superiority and their excellent financial management skills.

    • larndis on 28/04/2023 - 20:34

      Definitely want to avoid this! The kids don't need to know about these accounts right now but I would like to set this aside as we don't need the $ ourselves, and given property prices it's likely we will want to provide some assistance.

      They do have pretty comfortable lives but they definitely don't get everything they want. The eldest is keen to get a job ASAP because her pocket money is so paltry! I on the other hand didn't get my first job until after finishing year 12.

      We often talk to them about the difference between being able to afford something and it being a good idea.

  • brendanm on 28/04/2023 - 10:25
    +1

    Buy them a house now, take advantage of the tax breaks, have a tenant pay it off, then they can sell and split the proceeds when they are older.

    • larndis on 28/04/2023 - 22:40

      This is an intriguing suggestion, I'm very comfortable with investing in property and getting a 100% loan isn't an issue. There should be some good options if aiming for a net cost of $900/m. I guess I hadn't really considered it as I was looking at more liquid options, with something in each kid's name that they can access when needed.

  • djkelly69 on 28/04/2023 - 10:40
    +1

    Not sure where people are living that $900 a month can buy a house, seemingly without a deposit as well?

    • brendanm on 28/04/2023 - 13:47

      Op owns their house outright. They can use the equity for a deposit on an investment property. They then rent out the property, and the tenant pays the mortgage for them.

      • djkelly69 on 28/04/2023 - 14:05

        They can do that, but they said they just paid off their mortgage and were looking to invest $900 a month for their kids. Might hazard a guess they are not looking to re-mortgage again having just paid it off.

        • brendanm on 28/04/2023 - 14:43

          The amount they would have to take on their house would likely be less than the $900 a month they want to put into an investment.

  • Daniel Plainview on 28/04/2023 - 10:52
    +1

    Vanguard are good - but for the kids investment span I'd instead recommend you purchase them the ASX listed ETF, DHHF - the rationale being that it's 100% growth equities (all the vanguard options have bonds within them taking up a significant %).

    Very low management fee - diversified, simple single ASX listed and AU domiciled - will be very simple to sell if you need to. Set up Sharesight accounts for each one of them to make the tax super simple as well - ensure that you're enrolled in dividend reinvestment.

    Could set up accounts for each of the kids at CMC Markets, where the brokerage for small parcel buys will be free - which is handy for such small investment buys (sub-$1000 free brokerage each day). Best of luck.

    EDIT: there are many very low dividend paying ETFs that rely on capital growth instead - perhaps look at those instead (not sure what DHHF's dividend paying strategy will be as it's newish) - IVV would be an excellent choice, can't go wrong with the S&P500 and super low MER. This allows you just to open an account in each of the kids names, avoiding paying high fees in trust fees each year - which would be a major issue for you. DYOR as I'm just doing this based off the info at hand - but the above is simple, cheap and should outperform other more complex options. :-)

    • larndis on 28/04/2023 - 20:35
      +1

      Thanks, I'll take a look

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