Considering investing in your child’s name? Tread carefullyby Wealth Architects / 05.09.2018
We all want what’s best for our children. So while investing in their name from an early stage might sound like a great idea, you need to tread as carefully as you would around an abandoned lego construction site.
Some people invest in their child’s name as a way of engaging with them and encouraging them to invest in their future from an early age. That said, there actually aren’t that many pros to putting money in their child’s name.
As it stands, minors can earn up to $416 per year tax-free before high tax rates kick in.
This means the pros are most likely outweighed by the cons when it comes to investing in your child’s name.
The first downside of investing in your child’s name is the difficulty involved.
Most fund managers won’t accept direct applications from minors due to the potential legal implications, while some companies prohibit shares from being purchased by anyone under the age of 18.
Additionally, a few decades ago the Australian government closed a loophole which was thought to allow wealthy parents to escape tax responsibilities by investing money in the name of a minor.
This means once a child’s unearned income has exceeded $416 a year tax rates of up to 66% now apply.
There are a number of alternatives to investing which could result in a higher return, including investment bonds.
If your family pays a higher rate of tax – particularly if both parents are working – investment bonds could be a more effective way to invest and save on tax. That’s because earnings are taxed at 30% within the bond.
Investment bonds are also handy when it comes to your kids because they’re designed for the long-term. Usually 10 years or more. They can then be transferred when the child comes of age, and generally not have to pay any Capital Gains Tax if the investment has been held for at least 10 years.
You could also benefit from investing directly into shares, managed funds, exchange traded funds (ETFs) in the name of an adult spouse with a lower income however be aware of changing circumstances over the long-term.
If you’d like help investing in both your child’s name and their future, then don’t hesitate to get in touch.
That way the only costly misstep you’ll have to worry about is that of the scattered lego kind.
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