I'm after some ozbargain advice.
My two kids (eight and three) inherited $28K each. We want to let the money 'work' until they're eighteen, and I guess grow at a rate more than inflation…
I guess my options are:
Longterm savings account (interest Raes are low though)
Managed funds (susceptible to economic downturns (1998, 2008, ??)
???? Profit
Since I think my kids are alright, I'd like to do the right thing by them.
Any ideas are appreciated.
Thanks :)
Interesting. Thanks mate
Low cost index fund.
I wouldn't invest in a managed fund if it's for the next 15 years.
During the GFC a lot of funds didn't allow investors to withdraw funds.
Either buy BHP or RIO shares or one of the banks or a combo of these.
During the GFC a lot of funds didn't allow investors to withdraw funds.
Link to this?
An ETF Index Fund like Vanguard would be alright I think.
Hello Bellpop,
First off its wonderful that you want to do what's right by them. I believe nothing is as powerful as compound interest, especially with time on their side.
First, look at the past performance for Vanguard's products over the last 10-20 years (I would choose international shares at 5.1% growth on average).
See how I got that percentage: https://www.vanguardinvestments.com.au/retail/ret/campaign/i…
Then, use a compound interest calculator to see the total balance in 15 years:
https://www.moneysmart.gov.au/tools-and-resources/calculator…
($59,047). So you've more then doubled their money with no work, and hopefully taught them the value of investing wisely.
Let us know what you decide to do either way (:
Thanks for the info and explanation. It sounds good and the returns sound solid, however, wouldn’t the profit be taxed at 66c/$1?
I’m not being critical, just trying to get my head around it.
Thanks again :)
Yes it will.
I think only dividends paid out each year would be taxed at that high rate (only over a certain limit - $416?). Capital gains is only taxed when the asset is sold. So if shares were bought now, but only sold after they turned 18, that is when the CGT would be due. Certain managed funds may have different tax rules though, I'm not sure.
Good advice above, but a few things you should take note of:
look at the past performance for Vanguard's products over the last 10-20 year
So you've more then doubled their money with no work, and hopefully taught them the value of investing wisely.
That $59,047 will have much less buying power than the equivalent would today.
https://www.rba.gov.au/calculator/
Despite these academic points, I 100% agree with movieman's advice.
If you want to invest it in an index fund, I recommend picking one of Vanguard's ETF products as the fees are lower, and they're easier to manage (for such a small investment).
You can buy into it with SelfWealth for free (5 free trades using the Ozbargain link)
But just buy it and forget about it, even in a bear market (don't try to trade it like a stock).
I personally recommend this fund: https://www.vanguardinvestments.com.au/retail/ret/investment… but according to Vanguard, most people here invest in this: https://www.vanguardinvestments.com.au/retail/ret/investment…
This is a good idea.
When they are 18 tell them that money exists and they can do whatever they want with it.
If they want to use it for a deposit… great.
If they want to take $20K and have a bloody great holiday after finishing school (personally what I'd do) encourage them to go ahead.
Depends on the kid at 18yo, 20grand could buy lots of drugs+alcohol to binge on and fund other reckless behavior in Bali and alike :/ .
I’d invest in pumpkins. They’ve been going up the whole month of October and I expect them to peak in January.
Haha
Use acorns and continue adding some small amount (maybe $200 into each account) every month. i won't even bother to calculate the total after 15 years, but it'll be a decent chunk. More than any of the other suggestions
I’ve heard acorns Sux. Besides it’s a one off payment.
A 20oz gold bar each.
Dont tell them when they're 18, they'll just blow it. Keep it until they're adults and you're retired. If they treat you like shit, keep the money, or else give them before you die.
Haha brutal 😂
kids earning over $416 from investments will end up paying a lot of tax. (more or less top tax rate) and would result in them potentially lose the ability to get new starter or other similar allowances in future (when and if they need it)
There are few tax effective ways of saving money in kids names (see below)
An education bond (e.g. Australian Unity has an education product) - But returns are only tax effective if earnings are used for education related expenses (its basically a managed fund but has some tax benefits and some restrictions).
Insurance bonds (these pay tax at corporate rate internally and earnings are not required to be included in tax return) and some other good rules.
Although, a comment above got negged, gold/silver are not bad for long term investments (some places like abcbullion offer something called pool allocated bullion, meaning you dont actually have to take home the bullion, do look it up)
Otherwise, you can always invest in your name and pay the taxes and keep a ledger for paying them back in future.
Good luck!
Thanks mate. I appreciate it
Actually, Education Bonds get benefits if used for education expenses or are otherwise taxed at the corporate tax rate, so they're a better option than insurance bonds.
Investment car.
Trust me ;)
The bankers salute you
If it is a share of other similar type of investments then there might be no issue with the tax provided that the kids do not realise the capital gain (sell the stock) until after they turn 16 or 18?
56k combined isnt much id just throw it in your mortgage or talking around ~4% (depending on your interest rate) return tax free which is better then nothing.
otherwise wait 12-months for this Royal Commission to die down and put it all on ANZ or Westpac
Put it all on Winx
go to some dirt poor country that somehow has better internet and buy a house and retire for 10 years then come back to the real world , hahaha .. welll that can work probs need a bit more money
Buying property in a developing country could work out well. Potentially risky.
Bit risky I think. Thanks anyway
Ok, and you don’t forget to put your tin foil hat on 😉
lol Tin foil hat? Buddy identity theft etc. is rife. Look at the stats.
precious metals and lock it up until they are 18
Maybe look into buying shares in ARGO or AFIC. Bot have been around for a long time, have good track records, charge relatively low fees and provide much better returns than a savings account. Consider reinvesting the dividends too.
Will look into them. Thanks for the heads up
The two top ideas that are tax efficient are into your offset account, or buy investment/education bond for the kids.
The bonds can be bought from Australian unity, Australian scholarship group, IOOF, Genlife and a number of friendly societies. Australian unity is the largest friendly society in Australia.
You could split between mortgage offset and the investment bonds
Thanks for the advice mate. Seems like finding a tax friendly option is key!
There are plenty of low cost EFT's that have a more conservative approach rather than 100% shares.
i.e. you can get one that has a mix of local & int. shares, bonds, property, bonds, cash and gold if you want lower risk
Thanks :)
As mentioned a number of times in this thread, I'd recommend an investment bond.
If you follow the other suggestions of bank interest or shares, then I think you will run into tax problems. Even if the return is only 1.5%, then you will exceed the $416 limit of childrens passive income and pay a marginal tax rate of 66%. Or if it is in your name you pay tax at your marginal rate.
IOOF have an investment bond that you can use to buy a low cost share market index (IOOF WealthBuilder Australian Shares Index - Vanguard). This might suit. It is relatively low cost and would meant that the investment is spread across Australia's top 200 companies, and the tax is paid internal to the investment at the company tax rate of 30%.
The recent Barefoot Investor Book also suggested a number of investment bond options.
Insurance bonds / Investment bonds are also highlighted by other money experts as a recommended way to invest for your children: https://www.smh.com.au/money/investing/how-to-invest-for-chi…
Thanks for your feedback :)
Can one easily setup a investment bond for the child by themselves without going through a FA?
yep - with IOOF it was just a form.
Put in your offset, pay off your mortgage, and when kids grow up help them to pay their initial deposit for buying their first home.
Good idea. Thankyou!
Hey Bellpop,
I think you've got the right idea with planning and most of the important things seem to have been mentioned:
Determine a risk level that suits preference. Over 10 years see how your super fund has done for each investment profile (they should have options of cash, growth etc) to get a feel for what similar investment fluctuations could be. As the trustee I think you can do pretty much whatever you want, but at some point you'll have to explain what you've done to your kids and if you put it all on black at the casino, even if you win that's the behavior you will be communicating
Factor in tax implications on the returns. Tax will be at whatever your marginal rate it, and as the earning get added to your or your partners income can effect government obligations (if you have government debts, HECS, if you hit the threshold for requiring private health insurance)
End Use: You have mentioned locking it up until they are 18. I would suggesting thinking a bit further (not in time, but in action) to what you think they should do with it. A gap year? Uni funds? A car? A deposit? The party to end all parties? The fact that you're researching leads me to think you'll teach your kids good financial practices. That said look to how else you would want to manage their finances (encourage saving of pocket money etc)as the lump sum could be used to encourage other saving habits.
Personally I'm a low risk kind of guy and would stick it in the mortgage offset and manage their interest in an excel document. That way its tax free, easy to access and if one of them gets headhunted to play football internationally at the age of 10 its a go.
Anyway you decide I would encourage you communicate where the money came from, and be thankful for the gift.
This is an amazing response. Thankyou.
We are by no means high fliers, but our combined income throws us in a pretty high tax bracket.
Seems like mortgage offset is the way to go.
I feel like we’re low risk people too. I would prefer to set and forget instead of being constantly worried about economic down turns and what could happen to their inheritance.
Thanks again, it’s much appreciated.
beat me to it.
Don't overlook putting the money in your mortgage offset but spread-sheeting the growth for your children, if you want something safe and reliable and above market rates (assuming it is for your home loan you live in, therefore the interest is non-deductible).
You need to consider the growth net of tax. If you invest in shares or managed funds this will yield a possible taxable income stream and/or capital gains. Depending on your tax bracket, this discounts the total value you will receive.
For example if you were in the 37% tax bracket (income between 80k + 180k)(39% inc medicare), if you were offsetting your mortgage interest of 4%, assuming no compounding your $56K would yield $2240 per year, and to get the equivalent in taxable investment you would need to get $3672 or 6.56% return so that when the tax comes out, you are in the same net position. This ignores capital gains and the 50% cgt discount if you were going down that path.
Thanks for the input. I appreciate it!
What you should actually do it put it into your mortgage offset account. Then you open another fee free account and deposit what your mortgage rate is minus 50bps. That way your kid is getting a better market rate than any term deposit, you get a free 50bps of interest on your mortgage every month. Win win for all.
If you want to make sure you don't have any pain paying the 56k back when they are 18, just deposit the pro-rata principal each month back into the savings account and just pay interest on the residual amount.
Yes you'll have to keep a spreadsheet for option 2. Maybe even for option 1 if you need to prove to your kids/family that your kid is actually getting a good deal.
Love your analysis. Thankyou :)
I would (as I have done for my kids of similar ages) establish a simple managed fund portfolio. I've set mine up as 65% Australian equities, 35% international equities. Of course, you need to determine your own risk tolerance with respect to asset allocation.
If you are adamant that no one will touch the money for more than 10 years, an investment bond with the above (or whatever your choose) asset allocation may be useful to generate some tax advantages depending on your personal tax situation (it's likely that you'll need to/it will be most beneficial for you (or another adult) to hold the investments rather than your children).
The key here is looking for something that will attract growth. If this is a 15+ year investment, and based on the amount you have, equities are likely to be the way to go. Downturns happen … and they affect your return … but over 15 years you will see upturns as well as downturns. You need to ride both out.
How old are you and your spouse?
36-37
Have you considered about using the money to buy an investment property. Especially if you can match the kids 28k each. Go thirds on the costs. Offest rental and sell in 15 years.???
This is an interesting idea. We have just talked about this! Great minds…
$56k worth of disposable plastic shopping bags becoz they will be extinct in 15 year lol just kidding /wishfulthinking
😬
If you put it into a trust fund (not the way you're looking to go by the looks of it.. but just incase) get a tfn attached to the account. I had 1-2k put into a trust for me when I was about 5 but due to it being poorly set up I lost 50% of the interest from when I was 5 till when I was 17 which is when I started putting tax returns in… 😒 a tfn attached would have determined I was under 18 and the interest would have stayed in the account (is my understanding at least… May have changed since the 90s/mid 2000s) also yes I've been told I probably could track that lost interest down but the guarantor was my uncle whom my dad doesn't talk to and I'm not even sure he's still alive anymore… :/)
Wow, what a bummer. Thanks for the heads up mate :)
Funny no one suggested Bitcoin. I don't think anyone expects them to be around in 15 Years.
Yeah, interesting hey, this time last year would have been a different story I think!
Yep very few people understand Bitcoin or any cryptocurrency/blockchain technology. It's all a scam to most. In 15 years, people will look back and either say, yeah it was or geeze I wish I put just $100 in.
Not sure if Super is allowed for kids, but there is a recent scheme called FHSS I think. You can put up to $30K into Super and withdraw it to buy a first house. Super would provide a softer way to enter the stock market. Downside is all the interest would be stored in super and not accessible.
Ah interesting. I’ll add it to the list. Thankyou!
My parents just put mine in a term deposit that auto-renewed each year.
Thanks for the input. I guess minimising tax (we pay enough!) is what we’re looking at now :)
Thanks mate
I would suggest a Listed Investment Company with low management fees that offers a Dividend Substitution Plan, such as Whitefield (WHF). New shares are substituted for dividends, so there is no tax to pay on earnings. Later when they are older, they can choose to sell if they want, and they will have to pay capital gains tax on each new share they were issued at whatever price it was at the time, but if they plan well, maybe when they are studying or low income, it might not end up being too much - or of course they could just choose to keep it tucked away, compounding nicely - which would be even better.
This blog post explains the difference and pros and cons quite nicely - https://carpedividendum.com/2018/09/05/dssp/
Thanksyou
Buy some government bonds in their name. As long as it’s not issued by Greece or some other risky country, it’s fine.
Haha noted
All into Bitcoin
What could go wrong?!
Don’t tell them about the money until they are 18.
Good idea. Later even I reckon…
Find a low cost index fund, or buy into a low cost index ETF.
Ishares funds tend to be quite low, and they just buy an equal share of the top 50, 500, 1000 companies in the market.
You're generally well diversified against a market sector failing, the only concern is if the whole market drops, however the market has always bounced back so far.
Thanks mate
A lot of the replies so far are only considering the costs and returns, when the main factor here is actually tax minimisation. Either the children or you will have to work out a lot in tax. You have a great time frame, being 10+ years.
Consider putting the money in an insurance bond and invest in ETFs within. This way there is no tax payable on earning (as all tax is paid within the investment) and after 10 years the money is completely personal tax free when withdrawn.
The insurance bond is the structure, like a platform,but you can invest in term deposits, managed funds etc within it.
Good thinking. Thanks
Invest in csl shares
Or buy an investment property.
Given current prices might be the only way they'll be able to break into the property market.
Thanks mate
Go for a high yield investment car like an AMG
That’ll need 80k to be done properly, right
All though the amount seems like a lot it really isn't I would actually use those funds to clear your own debt and start investing for a better, more secure future for you and your kids, so you don't become a burden on them later on.
Interesting perspective. Thanks.
Not sure if it’s been posted.
1. PLATINUM ASSET MANAGEMENT FUND = have returned roughly 12-15% since 1995.
That includes the 2000 dot com crash, the GFC and everything in between :)
Pretty good return and long term performance.
Many funds you have to be careful of, in fact most (since many failed in 2007-2010 like MQ Group’s high yield fund!) are post-2008 funds.
They aren’t even nearly as affected by the HUGE swings in equity funds or stock markets. So much more peace of mind. No large drawdowns like the stock market (2 x 40% or more declines since 1999 in stocks ffs).
Very very experienced guy - his premium portfolio (U.S stocks) in this website also reduces CURRENCY risk (aka hedging against the AUD’s continuous drop which, expecting to get to 60-65c).
He uses trading systems which, feel free to google: AMIBROKER, and Monte Carlo methods testing = where you can test your systems with ‘what if this had happened’ scenarios (e.g. what if the GFC occurred in 2012, 2016 and 2018? Etc.)
They have been extensively back tested (I know because I have been using it for a while for family and am also a professional systems trader myself :) so I know how it all works and how rigourously it has been tested. It’s quite simple too! 16 trades a year, 5 positions held, rebalanced monthly.
This way you’re not having a financial advisor or fund manager cut into your profits, you’re still in charge and able to access your money at any time if you require, and the (minimum 2 years you’d want to do this to reliably achieve these returns) compounded annual growth rate is 30.2%.
30.2% is insane especially when you consider the fact THIS DOESNT include your profit made from being in US stocks (in USD which has appreciated by 30% in the past few years against the AUD)
= return from capital growth is 30.2, and return from currency appreciation of the USD (even just this year it’s 14% from currency alone!) = crazy.
OR you could ignore no.3 and sacrifice a little bit of profit for no.1 or 2 = being your safest and EASIEST options in terms of no managing anything yourself :)
I can totally understand why no.3 would be emotionally difficult (sometimes it’s hard not to keep an eye on, or ‘use discretion’ and try and tweak the system right? Hahah I do it still with my other systems sometimes..and I’ve been doing this awhileee professionally).
(Just thought I’d mention no.3 since it opened a whole new world for me when someone got me into it - I used to think property was the only way…now I’m a full time trader and retired from 9-5 :) Lets me make posts like this in details wooo!
PS JUST keep in mind! RETURN isn’t good enough, it should be return ACCORDING to global relevance aka say if you use the USD as a bench mark, a 20% returning equity fund is NO good if in the same time the AUD goes down 20%.
Hence why many commodity funds will be in USD or many equity funds hedge (hence the word hedge fund..) against currency and political risk.
Example: Told a friend of mine to open a broker account (Interactive Brokers) and do NOTHING BUT change his base HOLDING currency in his account from AUD TO USD when the exchange rate was 85c
It is now 70-71c (should tank today due to new forex unemployment data) and he has converted his ‘HOLDING currency from USD TO AUD’ in his brokerage account, back when AUD hit @ 70c 1-2 weeks ago.
Made 15/85c gain which is like 20% from doing nothing in just around 1 year…that’s something you could do too? Lol
(This is NOT personalised financial advice, as I do not know your situation and exact goals, and is for educational purposes only to help highlight what I do! - hopefully it helps!!)
TLDR?
I read it. Twice!
A bunch of investment/fund management advice/history.
Wow. Amazing response. I really appreciate it :)
Powerball.
Due to it being inheritance from a deceased relative a testamentary trust can be established with the kids as the beneficiaries and the parent as the trustee, put the money into Asgard, North, MLC or something similar, because it is a testamentary trust and thus income from a deceased person estate it is taxed at the normal rates and given the amount it would be well below the tax free threshold anyway. The money can also be kept safe and away until the kids turn 18 or special requirements can be set for whatever condition needs to be met, ie the youngest must be 18 or 21 or must own a house to access that sort of thing.
Separate to that matter having a conditional testamentary trust on any will is a good idea in my opinion, it keeps the assets safe from any incident.
Your child has a marriage you think wont last, ba bang its in a T trust and not included in the divide of assets during a divorce.
You remarried and both of you have adult kids and you want your second wife live in the home for her remaining life but want the asset to belong solely to your kids rather than split between yours and hers? Zippidy-do a testamentary trust can do it.
Want one person to get all the rental income from a property but the another to get all the capital proceeds, done.
Your child is hopelessly irresponsible with their money? Same set up in the initial comment but have a set amount distributed to them each year and condition for release being debt free with a house, oh beans they went bankrupt instead, good thing their inheritance is safe because its protected by the trust, better luck next time creditors.
Are you always this late?
No, but an opportunity to tell everyone how great testamentary trusts are needs to be taken, even if only a few see.
I was 17 when I got my inheritance, I agreed with my parents for them to put it in the mortgage.