5 Ways to Invest for Your Kids And Avoid the Tax Traps

Want to start investing for your kids but not sure where to begin? In this episode, Molly Benjamin Founder of Ladies Finance Club chats with Everest wealth advisor Daisy Magor to break down the five main ways to invest for your kids including the tax traps parents often miss (yep, we’re looking at you, minor accounts 👀). If you’re a parent, auntie, or future mum, this is one to bookmark!”

🎧 Hit play to get smart, practical tips on setting your little ones up for financial success - without the confusion.

Want to discuss your own personal situation with Daisy - book in a call with her here. 

This episode is brought to you by InvestorKit, Australia’s #1 Buyers Agency for 2023 and 2024. They specialise in helping investors find high-growth properties utilising industry leading AI and data driven research process across Australia. 70%+ of the properties they purchase are off-market and they have consistently outperformed national average capital growth rates by over 49%. Whether you’re looking to build your property portfolio or secure your first investment. Check them out here.

CHAPTERS

00:00 – Welcome & Why This Topic Matters
01:10 – Option 1: Investing in Your Own Name
02:25 – Option 2: Minor Investment Accounts
04:49 – Option 3: Education Bonds
07:24 – Option 4: Superannuation for Kids
09:13 – Option 5: Family Trusts
11:01 – Which Option to Avoid (and Why)
12:00 – Don’t Forget Financial Education
13:56 – Opening a Bank Account for Your Child
14:36 – Wrap-Up & What’s Next

LINKS AND RESOURCES FROM THE EPISODE

First Home Super Saver Scheme (FHSSS) - https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/withdrawing-and-using-your-super/early-access-to-super/first-home-super-saver-scheme

CONNECT WITH DAISY MAGOR

Website: https://everestwealthgroup.com.au/
Instagram: https://www.instagram.com/everestwealth/
Facebook: https://www.facebook.com/EverestPW/

CONNECT WITH LADIES FINANCE CLUB

Join our free Facebook group - Ladies Finance Club Money Chat
Website: https://www.ladiesfinanceclub.com/
Instagram: https://www.instagram.com/ladiesfinanceclub/
LinkedIn: https://www.linkedin.com/company/ladies-finance-club/

TAKEAWAYS

• Investing in your own name is the simplest method.
• Minor investment accounts can be complex and misunderstood.
• Education bonds offer tax advantages for educational purposes.
• Superannuation can be a tax-efficient way to save for children.
• Family trusts provide security and flexibility for significant amounts of money.
• Teaching kids about money is crucial for their financial literacy.
• Exposing children to money management from a young age is beneficial.
• Parents should model positive financial behaviors for their kids.
• Understanding tax implications is essential when investing for children.
• Opening a bank account for a child is a straightforward process.

SOUND BITES

"How do we best save for our children?"
"Super funds are taxed at 15% internally."
"Everything in life isn't free."

TRANSCRIPT

[00:00:00] Molly: Welcome to another episode of Get Rich, the podcast helping you do just that. Get rich and stay rich. I'm your host, Molly Benjamin, founder of Ladies Finance Club. Now, if you are thinking about investing for your kids, before you go open that account in their name, listen to this because in this episode I chat with Financial advisor.

[00:00:20] Daisy Mango about the five smart ways to invest for your children, the tax traps to avoid, and why putting investments in your kids' names could actually backfire. And let's make a quick deal. If you learn something new from this podcast episode, you'll hit that subscribe button. It helps us keep bringing brilliant guests to the potty.

[00:00:38] All right, sit back and enjoy. So we get this question a lot 'cause we've got quite a few moms listening and it's all about, well, how do we best save for our children or best invest for our kids. So I wanted to chat with you about the five main ways to invest for your kids and maybe the pros and cons of each.

[00:00:57] Now, I know we did do an awesome webinar about this with [00:01:00] Ladies Finance Club, but the content was so good and people on that webinar were like, wow, this is the clearest I've ever heard it. So I thought, let's turn it into a podcast. Awesome. Can't wait. Okay, so what is

[00:01:11] Daisy: the first way we can invest for our kids?

[00:01:15] So probably the most simplest and what we see definitely the most is just parents investing in their own name. So I'll set up a investment account in my own name, but it's there for my daughter. So yeah, it's definitely the most simplest and the one that we see the most. Okay. And what are the tax implications there?

[00:01:33] Any dividends, any distributions received from that portfolio is taxable income in my own name. In that example, any capital gains again, would be in my own name, but then you'd also get the discount that comes with being an individual and being an investor if you hold it for more than 12 months.

[00:01:52] Molly: Awesome.

[00:01:52] Is there anything else I need to think about if I'm putting it in my own

[00:01:56] Daisy: name? I suppose if you and your partner are looking at [00:02:00] investing for your kids, one thing that we always have a look at is different tax rates. So if my partner was on a much lower tax rate than me, I would potentially invest in their name compared to in my name.

[00:02:11] So yeah, they're probably the biggest things. I mean, as I said, it's definitely the simplest, the easiest way to set up a small investment for your kids for the long term. Awesome.

[00:02:21] Molly: Okay. And what about another way? So we've got a minor investment account, so

[00:02:25] Daisy: what is that? Yeah, so minor investment accounts are definitely becoming more popular probably in the last 18 months, two years.

[00:02:32] Yeah. There's a lot of stockbroking accounts that are now allowing you to open these minor investment accounts. I suppose. They're very misunder. Stood in how they are taxed. So effectively it would be myself as trustee for my daughter, and they kind of promote that you would be able to transfer to your child at age 18 without having to incur any capital gains tax.

[00:02:56] But I suppose you just have to be careful with that, which I'm sure we'll go into on [00:03:00] kind of Yeah, the different implications of how you structure that. Yeah.

[00:03:03] Molly: So. Yeah, I guess, what are those implications?

[00:03:06] Daisy: Yeah, so a lot of people believe that similar to setting up an account in your own name, that the any distributions, capital gains, all of that would be taxable in the parent's name until the child hits 18.

[00:03:20] That isn't the case and the a TO have. Released quite a few rulings recently where you need to set up a tax file number in the child's name and any income, so distributions, capital gains needs to be declared in the child's tax return. Obviously, if the child is a minor, minor, tax rates come into play, which are extremely high compared to the marginal tax rates of adults.

[00:03:45] Yeah.

[00:03:46] Molly: Okay.

[00:03:47] Daisy: Another way we've got education

[00:03:48] Molly: bonds.

[00:03:49] Daisy: Yeah. So education bonds is definitely something that we've come across quite a bit as well. So education bonds are kind of an informal trust, so they're not as [00:04:00] kind of formal as a family trust where you have list of beneficiaries, but education bonds are purchased in the adult's name, and then you can have numerous miners.

[00:04:08] Listed as a beneficiary. So they're a really good way from a tax perspective to set up for long-term. So high school education, things like that. But again, they're quite a complex structure that people don't really understand when setting them up themselves. Okay. So you kind of need to go to an advisor for that.

[00:04:27] Yeah, there's a lot of great information online. I suppose it's, it's hard for someone that doesn't have a finance degree to kind of understand when they can pull it out, the different components that come with an education bond. Yeah. So yeah, I would definitely suggest doing a lot of research or reaching out to an advisor if that is your way and actually what is an education bond?

[00:04:48] So an education bond is effectively, it's an investment account that you set up for your children. So you can put money in, you can put a lump sum in, you can put a savings plan in. So $50 [00:05:00] every fortnight, whatever that looks like. And there's two components of a bond. So there's the capital component and the earnings component.

[00:05:08] So the capital component is there with all the money that you've put into the bond, and then any earnings component. Then forms part of the earnings part. So there's different ways that, different tax implications of pulling money out of the earnings bond compared to the capital bond. And I suppose the whole purpose of this bond is there for education.

[00:05:29] So it is there, that's, yeah. You pull it out for education purposes, whether that be high school. Yeah. Tertiary. School territory. Yeah.

[00:05:39] Molly: Okay. And so with the education bonds, so you know when we have normal bonds, which is kind of like when you loan your money to the government or corporate companies and then you get paid a repayment, you get paid an interest rate.

[00:05:51] Is it the same as an education bond?

[00:05:53] Daisy: No. So education bonds are, are completely different. So a bond, an education bond is effectively a tax [00:06:00] structure you can invest in. All different things, like all different ETFs, all different investments. Okay. Within an education bond. So it's quite different to a government bond.

[00:06:10] Okay,

[00:06:11] Molly: great. So they just try and confuse us by having the same name. Exactly. That for us. And so with that education bond, it's a tax structure. We can invest it in, you know, ETFs, why would we do that over our own name?

[00:06:24] Daisy: Yeah. So kind of. When you go to withdraw the money from Yeah, like to pay for high school, to pay for tertiary, depending on which area you're pulling out of, it can be tax free.

[00:06:39] Oh. So, and it like just has a completely different tax structure. So Yeah. It just has a tax rebate attached to it and yeah. If you're both high income earners and have a child, then it can be a really great way of segregating some money aside where it's not taxable in the child's name and not taxable in your name.

[00:06:59] Molly: [00:07:00] Okay, awesome.

[00:07:01] Daisy: So education

[00:07:02] Molly: bonds. So that could be a great vehicle for some, I hate saying the word vehicle, but that could be a great option for some families.

[00:07:09] Daisy: Yeah, definitely. But yeah, as I said, setting it up yourself can be quite complex if you don't un fully understand it.

[00:07:16] Molly: Yeah, it sounds a little bit complex.

[00:07:19] Yeah. Alright. What about our super fund? Yes. We've got that as one of the five ways.

[00:07:24] Daisy: Yeah. So I suppose it's something that. Probably not a lot of people think about, but there's two ways that we see that you can use Super to, yeah, help your child. So the first way is super in mine's name. So yeah, setting up a super fund for them, making contributions to it.

[00:07:44] Super funds tax at 15% internally, so compared to a minor tax rate, which is in the high forties. So yeah, it can be a good. Tax structure, I suppose a lot of people say, yeah, but my kid can't get it out until they're, until they're 65 or reach a [00:08:00] condition of release, which is somewhat true, but there's things like the First Home Super Saver scheme and things like that.

[00:08:05] If you wanted to set up your child to be able to purchase their first home, have an awesome deposit, things like that, you can put money into super early on and yeah, pull that money out under first time Super Saver, for example. The second way of doing it is superannuation in your own name. So I have seen clients that are, yeah, in their mid forties, they've maybe got a 10, 11-year-old and they have set up a completely separate super account that is there for their child.

[00:08:36] So they know that they don't wanna give their child this money until they're in their sixties, and then at which point they would've met a condition of release. And be able to pull the money out and gift to their child. And that is purely just from a tax perspective. It also works really well for grandparents as well, who may be a little bit older.

[00:08:55] Okay. Yeah, I was like, otherwise you're waiting. Yeah. Till you're 60. You're like,

[00:08:58] Molly: thanks mom. [00:09:00]

[00:09:00] Daisy: Yeah.

[00:09:00] Molly: Billy didn't trust me when I was 19.

[00:09:02] Daisy: Yeah, no, a hundred percent. Yeah. So. It definitely is. Yeah. A grandparents thing or, yeah. If people are happy to wait until their early sixties and the alliance with when they wanna give their kids money.

[00:09:12] Yeah.

[00:09:13] Molly: And then we've got the fifth and last way, how to invest for your kids family trust.

[00:09:19] Daisy: Yeah. So this is definitely the most formal structure. Definitely costs the most to set up because we need to have a trust deed set up by lawyers. So how it works is that you would it again, it's just another tax structure.

[00:09:33] Yeah. Where we would have a family trust set up and the minor would be listed as a beneficiary of the trust on the trust deed. So this is just a way of protecting, um, those assets within the trust where they are specifically for the minor. They're not in either of the parents' names. If the minor gets a partner, like it's completely protected there as well.

[00:09:56] Molly: Yeah.

[00:09:56] Daisy: So yeah, it's a good way of setting it up, I suppose. It [00:10:00] is the most costly though, so, um, a lot of people kind of. Don't really factor this, this option in, unless it's a significant amount of money that they do wanna put aside for their child.

[00:10:10] Molly: Okay. Awesome. And with trust, is it 'cause of the tax that you save, is it like a tax, is that why people set them up?

[00:10:17] Daisy: No, not necessarily. So it's. More around flexibility and security. So with a family trust, any income that is earned in the trust needs to be distributed each year. So again, it would fall to the minor because they are the listed beneficiary on the trust deed. So again, they need a tax file number and then it comes in, the minor tax rates come into play again.

[00:10:40] But if we're talking a significant amount of money that you do wanna protect and do wanna ensure that your child gets, then it is, it is a great structure.

[00:10:48] Molly: Okay, so we've got in your own name. We've got the minor investment account, we've got education bonds, we've got the super fund, and then we've got the family trust.

[00:10:55] Yeah. Okay. Awesome. So out of all those, which one would you say is the [00:11:00] one to avoid?

[00:11:01] Daisy: I would probably say minor investment accounts, to be honest. Purely just because, yeah, like a lot of them don't even allow you to put a minor tax file number in when you're setting them up, so they'll make you put your own tax file number in, and then it's, yeah, just that murkiness of, all right, do I declare this income in my own name, and then it's.

[00:11:22] Can't be transferred to my child capital gains tax free at 18, or do I declare it in their own names? Incur higher tax along the way. Like there's just, there's just so many unknowns with minor tax, with minor investment accounts, purely from a tax perspective. I somewhat think it's simpler and easier just to invest in your own name and then, yeah, just transfer it to them at 18.

[00:11:46] Great.

[00:11:47] Molly: And is there any other way to invest for your kids that we might've missed?

[00:11:50] Daisy: I suppose there's like, I know that we're talking about money, but Yeah, investing in experiences, kind of, yeah, educating them on money is a really big thing. That's a, [00:12:00] it's a really big thing of what we see with a number of our clients is that like, we don't learn about this in school.

[00:12:04] Our parents didn't talk to us about money. So in terms of, yeah, investing for your kids, I think. Teaching them to money, exposing them to money is a really big thing that can set them up really well long term, because I definitely see the difference when our clients come in and their parents have spoken about money and being really open about money.

[00:12:23] Their view on money can be quite different to somebody who hasn't had that growing up.

[00:12:29] Molly: Yeah. And when we think about it, our money mindset, so the way we think, feel, and behave with money, it's made up by the time we're seven years old. We're just so young and it's completely influenced by how our parents behaved, acted what they did with money.

[00:12:42] So again, if you were getting good messages, awesome. But if you weren't like, I would say majority of people mm-hmm. Then yeah, we wanna make sure we're not, I guess. Role modeling those behaviors to our kids. Being careful with the language that we use. You know, [00:13:00] we're choosing not to buy that, not, it's not too expensive or it's too expensive.

[00:13:03] And I love also that piggy bank rule that I know Barefoot talks about and a couple of other people talk about where when you give your child money or when they get money, you're kind of splitting it into those three different accounts, whether it's, you know, something for the short term that they can.

[00:13:19] Spend straight away something for the longer term, whether it's something they're saving for, and then maybe a giving where in Australia we are so fortunate to live in this country, so it's like they get to pick a a, a charity or somewhere where they wanna

[00:13:31] Daisy: donate that. Yeah, absolutely. Yeah. And I think, as you said, exposing your kids to, to money at a young age in a positive way is really great.

[00:13:39] But I suppose it's, yeah, also. Allowing kids to understand that yeah, everything in life isn't free. And yeah, like as you said, we're choosing not to buy that rather than it's too expensive or we need to save up for that, I think is really great.

[00:13:52] Molly: Awesome. And just around opening a bank account for a child, 'cause this was a question that came up.

[00:13:56] Someone was just asking, what is the deal with opening a bank account for a [00:14:00] child?

[00:14:00] Daisy: Yeah. So I know that a lot of banks do allow you to open a bank account for a child. Very similar. Where Yeah, you would. Normally be trustee for the child, um, and then it would transfer over to the child. Yeah. Once they reach an age.

[00:14:14] So yeah, it's quite easy to set up. Um, there's no capital gains implications, so there's no worries there. It's just, yeah, purely that you would be trustee on the bank account.

[00:14:24] Molly: Awesome. Well, I think we might have to do another episode on teaching your kids good money habits. But for now, thank you so much, Daisy, for showing us and explaining to us those five different ways to invest the kids.

[00:14:36] No worries. Thanks so much, Molly.

KEYWORDS

 investing for kids, education bonds, family trust, superannuation, minor investment accounts, financial literacy, tax implications, saving for children, money management, investment strategies