I have 3 children and would like to start an investment portfolio for them. How much do I need, and what would be the best way to do this?
Bernie in Kingscliff, NSW
Top answer provided by:
How much you would need to invest now will mainly depend on the purpose of the investment and the investment time horizon. The best approach for this would be to start with your end goal and work your way backwards. Do you need these investments to fund their education? Or is the intention to retain this portfolio over the long term to pass this on to your children as an asset once they reach a certain age? How much is required to invest now and what to invest in would largely depend on above.
Another important area is tax. When investing for a child, there are a number of factors which will determine whether the income is taxed in the hands of the minor, the adult investing on the child’s behalf or the trustee of a trust of which the minor is a beneficiary. Generally, income earned by a minor is taxed at special minor rates which are higher than adult rates, unless the income is ‘excepted income’ or the minor is an ‘excepted person’.
An ‘excepted person’ is a minor who:
- Has finished full-time study and is working full time
- Has a disability
- Entitled to a double orphan pension
‘Excepted income’ includes:
- Employment income
- Business income
- Centrelink payments
- Income generated from the proceeds inherited from a deceased estate (including superannuation death benefits, including income streams and life insurance policies)
- Investment earnings from compensation payments
- Net capital gains or income from investments on amounts listed above
If income earned by minors does not qualify as ‘excepted income’ or if the minor is not an ‘excepted person’, below tax rates will apply:
Therefore, selecting an appropriate structure for the investment is very important. An adult investing on the child/s behalf or a trust structure might be more beneficial than investing in the child’s name, depending on your personal tax circumstances. Whether the suitable investment vehicle would be insurance/ education bonds, direct shares, managed funds, cash-based accounts (savings accounts, term deposits etc) or another method would also largely depend on tax implications as well as accessibility to funds.
Another thing to consider is the level of ongoing control over this investment. If the intention is to pass these investments on to your children, do you wish to impose restrictions on how they use the capital or income generated?
I would recommend starting with the purpose of investing these funds and looking at your personal tax circumstances to find the most appropriate investment structure/ investment vehicle. The amount required to be invested can be decided based on these factors.
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