Quick recap: In Part 1, I explained why investment bonds make terrible investments for kids. They’re the ‘bad’. Today, I’m bringing you the ‘good’, but let’s get ‘ugly’ out of the way first.
Really ugly, actually. These things are the shit sandwich of the investment world
Take a investment bond. Season it with some aggressive, parent-shaming marketing, add a side of wallet-gouging fees, and top with penalties if your kids don’t turn out to be academics. Ladies and gentleman, let me present to you Australian Scholarships Group.
When you deconstruct this crap sandwich, here’s what you get – an investment bond with a management fee of 1.6%, plus $60 every year for your troubles.
A return that barely matches inflation (if at all). A tax structure that guarantees a lot of parents (and kids) will be hit with extra tax when they make a withdrawal for education purposes. Not to mention your Family Tax Benefit will take a beating.
Want more? If you tick the ‘scholarship’ box and you kid doesn’t progress to higher education, you don’t get any earnings at all. That money gets ripped out of your account, and given to the kids that go on to post-secondary studies.
Seriously folks, you’re better off stuffing your cash in a shoebox that letting this crowd anywhere near it.
I could go on, but I think you get my point. Plus these people are litigious, and if I told you what I really think of ASG, I’d be tied up in Court for the rest of my life.
There’s a better way to invest for your kids. Let’s take a bite.
Fifty Shades of Tax Office Grey
Suppose you’ve saved some money up for little Sebastian, and you decide to buy shares with it.
Every year, you get a dividend, which you deposit into Seb’s bank account.
Then five years down the track, you find yourself hard up for cash, pocket the dividend, then sell the shares to pay Seb’s school expenses.
Who declares the dividends? Who cops the Capital Gains Tax?
Probably you. I say probably, because even the ATO is as clear as mud when it comes to holding investments for kids.
There’s another way, which is better, but still not foolproof.
When you buy the shares, you make it clear that Sebastian is the beneficial owner, and you’re just looking after his shares. So you’d name your share trading account something like this:
If you make sure he’s got his own Tax File Number, and every cent paid in dividends is invested in his name, then the ATO will probably accept that you’re looking after them for him.
When he’s old enough to make his own financial decisions (so around 35), you can transfer the shares to his name without penalty. That way, he cops the CGT bill when the shares are sold, not you.
Sounds good? Nah. The ATO’s on to this one, and even using the
Invest like a Liberal Politican
Let’s talk about family trusts, because the government won’t. That’s because around half of all Coalition members of parliament have one, and they don’t want anybody rocking the tax minimisation boat.
Lawyers and accountants would have you believe family trusts are complicated and you need to pay a bundle to, you guessed it, lawyers and accountants to benefit from one.
It’s not true. Trusts are simple structures that have been around for centuries.
If you can lodge your own tax return and keep decent records, there’s no reason why you can’t own of these little beasties yourself.
You just need a founder (the person who puts the money in), a trustee (that would be you) and beneficiaries (you, your kids, grandkids, favourite pug).
You can get all fancy with a corporate trustee if you want. Refer back a few lines to lawyers and accountants lining their own pockets. I reckon you should keep it simple.
Oh, you’ll also be wanting a trust deed. I bought mine online from Cleardocs.com (that’s not a paid endorsement), but if you prefer you could sling a few grand at your accountant, who will then buy one from Cleardocs.com.
The Guts of the Trust
Here’s how they work, in around 100 words.
You put money into the trust. If you haven’t got any money, then go back to Part 1 of Investing for Kids, and read why you should pay your mortgage off before you invest for kids.
When the mortgage is off your back, divert the payments into a trust for a year. Then you should have $20,000 or more, and you’re rolling.
You invest money, which will give you (if you follow my guidance…) income and capital growth.
Every year, you decide who should declare any interest or dividends. Minors (not miners) can cop income of $416 each year before penalty tax rates kick in.
If you’ve got grown up kids, you can sling more at them.
If you sell an investment for a gain, then you decide who should declare that gain.
But the money all stays in the trust. For years, or generations if you like.
(If I’ve lost you by now, don’t worry. I’ll be publishing an easy guide to family trusts on the website soon).
You getting my drift here? A family trust gives you choice. Flexibility. You can use your kids as a tax dodge. You can live like the sleek and pampered people of Double Bay.
And there’s more…
Can’t Touch This
MC Hammer probably wasn’t thinking about trusts when he wrote Can’t Touch This.
He probably should have – he blew around $70 million on bling before being declared bankrupt in 1996.
Although I would never using suggest using a trust to hide from creditors, they do provide some protection if your financial world turns to shit.
If your kids run into financial trouble and they’re a beneficiary of your trust, their inheritance is safe.
If you run into marital trouble with your partner, sorry, a trust won’t help you.
The Naked Takeaway
Family trusts are the gold standard for investing for the future of your family.
You could seek legal advice and line the wallet of your local lawyer, but you’ll find plenty of information on the tax office website.
Oh, and it seems people don’t like French bubbles anymore. I’ve copped plenty of abuse for criticising financial experts in Part 1, but nobody’s put their hand out for the $200 and a bottle of champagne.
All you need to do is show me why investment bonds are a better way of looking after your kids than investing directly in your name.
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The Naked Investor provides education, not advice. Do your own research, you know the drill.
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