The idea of a family legacy today is every bit as important as it was 200 years ago. Doing your part to ensure the future comfort of your children is essential in today’s uncertain times.
In fact, in today’s changing world, it may be one of the smartest decisions you ever make to safeguard your family from future adverse events. In the end, it’s a privilege and an honor to be a provider for the ones you love, which is why you should formulate an investment strategy for your children sooner rather than later.
Choosing the right savings account can set parents and children up for success. Australia offers a special high-interest savings account as a way to save for your child by opening up an account in their name.
These accounts have better interest rates than their adult counterparts, but there are also additional withdrawal restrictions. In order to open one, parents have to put the funds in their child’s name but also prove that the funds will be used for the child at a later date. This option is recommended for parents with children under the age of 16. It’s a good way to grow a small nest egg for future investment.
A Tax-Free Education Savings Plan (ESP) is another option where anyone (e.g., aunts, cousins, etc.) can contribute to the child’s future. It’s entirely tax-free for an income of $16,000 or under, which is a great perk to maximise your profits. If for any reason you do need to withdraw funds early though, you will be subject to tax penalties.
Bonds are a great way to diversify your portfolio as a means of solidifying your child’s future. Investing in the right government or corporate bonds gives you a chance to build a legacy over time, and the best way to guarantee consistent returns.
This option is one of the more responsible investment choices if you aren’t comfortable accepting the reality of different risks (or debt for that matter). Bonds can immediately make a portfolio more stable, reducing your overall risk, stabilizing your income and diversifying from investing only in shares and property.
You can also consider an insurance bond that allows the holder to operate the account without reporting its earnings as taxable income. If you’re able to leave the bonds alone for 10 years or more, you can withdraw the funds tax-free to either reinvest on behalf of your child. Or you can choose the child advancement policy (available on most insurance bonds) and transfer the account over to your child tax-free.
Setting up a trust for a child can be a great way to secure your capital growth or appreciating assets until your family is ready to take control of it. For best results, consider a Family Trust because it offers a good deal of flexibility when it comes to who’s allowed to access it and how the income is distributed.
A Family Trust is a particularly viable option if you have multiple descendants for whom you would like to provide. Investing in a single child’s name can make it difficult to guarantee a fair payout for everyone. Trusts do come with certain risks though that investors will have to weigh against the rewards. Trusts will not preclude investors from children’s tax rates nor will it provide total freedom as to how the money is used.
For example, if you choose to purchase a real estate property for your children while they are attending college, that unit cannot be put into your name. The Tax Office can potentially argue that the money was really an opportunity to exploit the market and charge back-interest for the lifetime of the trust. In other words, there are a variety of exceptions and exclusions that investors will need to understand to avoid violating trust rules.
Shares give parents more control over their money, which can be a huge perk for someone who wants to strategise their investments according to fluctuating markets. Younger parents can consider taking larger risks to grow their legacy’s nest fund once they feel comfortable with their total wealth. Regardless of whether you choose high- or low-risk investments, the key objective to spread out your risk remains the same.
Purchasing a property in your child’s name can be risky, especially if you can only afford a single investment. If your children are young, consider investing in a real estate trust that will spread the risk out over several different properties. If your child is older and ready to jump into the investment game, you can offer to be the guarantor on a property. This arrangement limits a parent’s risk (usually up to 20% of the total cost of the property).
Where to Next?
The best part of investing for your children is that it’s a chance to show them how to form a more profitable relationship with money. How parents spend their money is generally modeled by their children in their later years. You can discuss any or all of these strategies with your child to further ensure your family’s legacy. Get in touch with us today.