Financial Planning update: Investing for children

Published: Thursday 14 February 2019

Most parents wish, at some stage, to put some money aside for a child or grandchild’s future. This may seem simple on the face of it, but there are numerous things that should be carefully considered to ensure the best outcome for both parent and child.

If the amount to be gifted is anything more than trivial then you should seek professional advice to guide you through the numerous options available.

If you are giving a significant gift, your main considerations should include timeframe, risk, tax and control. If you have a purpose in mind for your gift, then this should also be considered within each of these points.

Timeframe and Risk

Timeframe and risk will jointly dictate whether the gift should be held as cash or invested. If timeframe permits an investment then you need to decide what level of risk you wish to take.

Some people choose to take more risk with this type of investment, perhaps because the child will have no access to the capital for a set period, or perhaps because if a loss is realised, the child cannot miss what they never had.

Others may prefer to ensure the capital value is protected, particularly if it is earmarked for a set purpose. Remember that, over medium to long terms, capital needs to be protected against inflation as well as investment risk.

You should consider appointing a finance professional to assist you in selecting and managing investments that are appropriate for your desired level of risk. This will give you the best chance of maximising the value of your gift when the child needs it.

Tax and Control

Tax and control factors usually involve compromise. Generally speaking, if you retain control then any tax is assessable against you, whereas if the tax is assessable against the child, the child usually gains automatic control at age 18. If they then decide to spend it all on cars/handbags/beer, you will have no legal right to stop them.

There is a ’best of both worlds’ option which creates flexibility in terms of tax planning and allows you to dictate when and how the money is spent. This option can even protect the gift from any divorce or bankruptcy that the child may experience in later life.

This requires the use of complex and sometimes costly trust structures, and care must be taken as certain structures allow for some outcomes but not others. Professional advice is therefore well worth paying for to ensure the structure is suitable. The higher costs often prove negligible compared to the control, protection and tax savings gained.

If you are thinking of making a gift and wish to explore these options further then please speak to your adviser at Hazlewoods. If you are not already a client of Hazlewoods, then please get in touch and ask to speak to someone in Financial Planning.