How do you grow wealth for your children?
There are many benefits of investing for a child:
- Leaving a legacy for them
- Providing for education expenses
- Having enough money for the big purchases (car, house etc)
- Teaching them how to invest
- Teaching them the miracle of compound growth
The structure of Ownership
No separate investment structure
You and/or your partner can buy the investment in your name as trustee for the child. To transfer the ownership of the investment to the child when they reach 18 years of age without Capital Gains Tax, the income should be reinvested or deposited into an account for the child’s benefit. The child will have to pay tax on the income once it is above the lower threshold of $416. As tax outcomes can vary and change over time, you should seek tax advice before undertaking such a strategy.
Structured investment
As an alternative, particularly for high income earners, you could use an existing structure like a discretionary family trust or consider an investment bond. Again, tax advice should be sought, as there are ongoing tax and succession issues to be aware of.
Investment bonds are taxed internally at 30% and after 10 years are capital gains tax free. There are a number of providers – check the fees, investment options and past performance (the largest provider in Australia is the most expensive and probably not the best option).
What to buy
Consider a few options*:
- An index fund (VAS etc)
- An traded managed fund (MGE, PIXX etc)
- A Listed investment company (AFIC, ARG etc)
- Buy shares in companies to build a diversified portfolio (you’ll need a significant amount to achieve this).
Place the investment on a Dividend Reinvestment Plan (DRP). This will reinvest the dividends into new shares and compound the growth over time.
How much to invest
Say you invest $2,500 initially and then $50 a week ($2,600 p/a) for 10 years, reinvest the dividends and receive an average annual return of 8%:
| Age | Scenario 1 | Scenario 2 | Scenario 3 |
|---|
| You invest | Balance | You invest | Balance | You invest | Balance | |
| 0 | $2,500 | $2,700 | $2,500 | $2,700 | $ – | $ – |
| 1 | $2,600 | $5,724 | $2,600 | $5,724 | $ – | $ – |
| 2 | $2,600 | $8,990 | $2,600 | $8,990 | $ – | $ – |
| 3 | $2,600 | $12,517 | $2,600 | $12,517 | $ – | $ – |
| 4 | $2,600 | $16,326 | $2,600 | $16,326 | $ – | $ – |
| 5 | $2,600 | $20,441 | $2,600 | $20,441 | $ – | $ – |
| 6 | $2,600 | $24,884 | $2,600 | $24,884 | $ – | $ – |
| 7 | $2,600 | $29,683 | $2,600 | $29,683 | $ – | $ – |
| 8 | $2,600 | $34,865 | $2,600 | $34,865 | $2,500 | $2,700 |
| 9 | $2,600 | $40,462 | $2,600 | $40,462 | $2,600 | $5,724 |
| 10 | $2,600 | $46,507 | $2,600 | $46,507 | $2,600 | $8,990 |
| 11 | $ – | $50,228 | $2,600 | $53,036 | $2,600 | $12,517 |
| 12 | $ – | $54,246 | $2,600 | $60,087 | $2,600 | $16,326 |
| 13 | $ – | $58,586 | $2,600 | $67,702 | $2,600 | $20,441 |
| 14 | $ – | $63,273 | $2,600 | $75,926 | $2,600 | $24,884 |
| 15 | $ – | $68,335 | $2,600 | $84,808 | $2,600 | $29,683 |
| 16 | $ – | $73,801 | $2,600 | $94,401 | $2,600 | $34,865 |
| 17 | $ – | $79,705 | $2,600 | $104,761 | $2,600 | $40,462 |
| 18 | $ – | $86,082 | $2,600 | $115,950 | $2,600 | $46,507 |
| 19 | $ – | $92,968 | $ – | $125,226 | $ – | $50,228 |
| 20 | $ – | $100,406 | $ – | $135,244 | $ – | $54,246 |
| 21 | $ – | $108,438 | $ – | $146,063 | $ – | $58,586 |
Under scenario 1 you have invested $28,500 when the child reaches 21 years of age the balance is over $108,000!
The benefits of compounding returns really kick goals in the later years.
Under scenarios 1 and 3 you have contributed the same amount ($28,500) which is grows to $108,000 and 58,000 respectively – start early.
| Age | Scenario 1 | Scenario 2 | Scenario 3 |
|---|---|---|---|
| 60 | $2,181,270 | $2,938,101 | $1,178,473 |
Now that’s legacy!
If you have more questions regarding investments for your children and grandchildren or just have general queries in relation to investments, please contact one of our Financial Specialists today. Alternatively, you can complete your details below and we’ll be in touch or give us a call on (03) 9835 8200.
DISCLAIMER: GENERAL ADVICE ONLY
The information provided in this blog is general in nature. It has been prepared without taking into account any person’s individual objectives, financial situation or needs.
Before acting on any information in this blog, you should consider its appropriateness to you, having regard to your objectives, financial situation and needs or seek professional advice from a financial advisor.
Accru are not recommending any investment or product, the investments mentioned are examples only. Please seek professional advice or do you own research for an appropriate investment.
