Parents! What's the first thing you think of when you achieve financial freedom for yourself? "How do I ensure my children will one day reach this milestone too..."
Same.
That's why today, Stefan Angelini and Tom Gleeson have taken an in-depth look at the various options available for investing - with the goal of gifting to your children in the future; Savings account
Share portfolio
Property Investment Bond
Jump into this episode if you'd like to know the considerations and structures that are important at the BEGINNING of this investing process to ensure the best result for you children in the FUTURE.
#investing#wealthcreation#intergenerationalwealth#inheritance#earlyinheritance
Tom Gleeson
G'day, everyone. Welcome back to the Real Wealth podcast. We're back after a busy June. Welcome, Stefan Angelini and back today to talk about investing for your kids future. Principally, why? Well, the why is twofold. Because. It'd be a wonderful feeling down the line to be able to hand off a gift to your kids and say, I saved diligently, I planned ahead, and here is something. But also the why incorporates the different financial vehicles that you can use to do so. So on that, we're going to talk today, just just a bit of a forecast of what we're going to chat about savings account versus share portfolio against property and finally investment bond. So there are advantages and disadvantages. But before we do that, do you want to cover off the disclaimer?
Stefan Angelini
Hey guys, Stefan here. Just letting you know this is all just general advice. Please don't consider as personal advice. And if you want any personal advice, go and consult your licensed financial advisor. We're going to talk about structures, tax structures. We won't talk about specific investments. And did you know cash and savings isn't actually considered an investment anymore?
Tom Gleeson
Really?
Stefan Angelini
No, it's just a savings vehicle. So like..
Tom Gleeson
Okay.
Stefan Angelini
Yeah, we have to write advice on it, which is not what you have to do.
Tom Gleeson
It's the classification of it.
Stefan Angelini
Which is a pain in the backside.
Tom Gleeson
Yeah, it's very good.
Stefan Angelini
That's where I'll go. Yeah, it's easy that way. That is the default, and that's what my parents did, and that's what my grandparents did. If you look back in the day when they actually did that, interest rates were a lot higher.
Tom Gleeson
Yeah.
Stefan Angelini
Good stuff. All right.
Tom Gleeson
First off, when it comes to investing for your kid's future, a lot of people would default to, without much of a plan, just savings account. Fair to say? I'm just squirreling money away. I'm just putting money away.
Tom Gleeson
If you ever heard of someone that was born in the 60s talk about their interest rates, when they bought their first house, they'll tell you about just how high the interest rates were. You had 18%, 21%. Now, you could imagine that if interest rates on home loans were that high, then you could get quite a lot of interest on your savings accounts. So if you're just putting money away for the next generation because you had no debt on your home and that was getting 15%, well, that's a great return. Well, over time, that's where it was. So if you look at the graph of where interest rates have come, and that's where your interest and your savings is sort of pegged to where the Reserve Bank have their cash rate. At the moment, it's 4.1%, so that's why you're seeing these high interest savings account at 4.5%. They're floating around.
Tom Gleeson
Yeah
Stefan Angelini
But now, things changed. Over the last 10, 12 years, interest rates have come right down to barely nothing. People have been up in arms because it's increased to 4.1%, but it was there 10 years ago.
Tom Gleeson
Yeah. Okay.
Stefan Angelini
Now, you're getting okay savings rates, nothing like it used to be. But still, it's not a better return than if you were in other markets long term. But what is it? Safe. Yeah, okay. Not volatile. Low risk, low reward. Yeah, that's it. If you want to put money away for your kids and you just want to make sure they actually get it, that might be the best option.
Tom Gleeson
Yeah, guarantee they're getting a modest amount rather than risking it for a greater amount.
Stefan Angelini
Yeah, exactly right. That sort of comes to the position of, if you've got a home loan, normally you have kids and a lot of people have a home loan and they have an offset account. And if you go, right, I'm going to put money in savings for my kids, and that savings account is going to earn 3%, and then you're going to pay tax in that 3%, or do I put it in my mortgage account or offset account, and it's going to offset my loan, which I'm paying 5% on. So you're saving 5% versus earning 3%. The issue with earning 3% is you pay tax on that 3%, pay tax at your marginal tax rate, unless you've got it in the kid's name. And then how much can your kids earn? This is where kids tax rates come into effect. Kick it on the earn up to $416 a year before they start getting taxed.
Tom Gleeson
Kid, as in 18, under 18?
Stefan Angelini
Under 18.
Tom Gleeson
Yeah.
Stefan Angelini
So they can start getting taxed pretty heftily. And then after 1,000 bucks or so, it comes down to 47%. So it's not advantageous to give your kids heaps of money.
Tom Gleeson
They know.
Stefan Angelini
Yeah, that's right.
Tom Gleeson
Yeah. Okay.
Stefan Angelini
And not if they're making a lot of interest. Just a little bit, it's all right.
Tom Gleeson
So does that mean in summary, probably not a bad call from your parents and your grandparents, given the context, given the interest rate at the time? However, current climate, not your best option.
Tom Gleeson
Yeah. Savest, maybe, but not the best.
Stefan Angelini
Savest. Savest. And if that's your personality, you just want safety, then great. Yeah. Awesome. So that.
Tom Gleeson
Leads us to another option that would be looked at by a lot of parents wanting to save their kids is investing in shares. So take that money rather than just sit in a savings account, let's invest it a little bit more aggressively. Take on higher risk, higher reward. How does that play out?
Stefan Angelini
It's all about whose name it goes into the issues of holding it, who earns the dividends. First off, how do you get the money to your kid? It's all good to earn a return, but how do you get the money to your kid? Do you have the asset in their name? Do you have the asset in your name? Who earns the dividends on it? If you declare dividends in your tax return, then technically it's your asset, even if you've got the rest of your kids. But if you say the kids own the dividends and it can be the kids, you can give them the shares in the long term. But let's say that you own a stock or an index and you hold it for 20 years and you say it's on behalf of your kid, but you declare dividends in your tax return. Because you want the franken credits and then you got to transfer it to your kid, you're probably going to have a capital gain event.
Tom Gleeson
Okay. So that's a shame. That's a shame setting it up in their name in the first place.
Stefan Angelini
Yeah. So if you buy a specific stock for, say, $10, it goes to $30, and you have got a capital gain event of $20 on the individual change on the stock. You can be in a lot of stride when it comes down to transfer.
Tom Gleeson
The kid's going to inherit the shares. The kid's also going to inherit the CGT.
Stefan Angelini
Well, the parent has to pay the tax. Oh, their tax. Yeah. The ATO will catch you up eventually because when do a name transfer, it's changed ownership. Unless you can prove it's always been beneficial, the kid has always been the beneficial owner. They've always had the entitlement to it, then you're right. Otherwise, it's tough, but you can get decent returns.
Tom Gleeson
Better return through a simple cash account?
Stefan Angelini
Yeah. I'll give you an example. What's an index fund we can use? Asx200? Asx200. Top 200 companies in Australia, weighted by market cap, pretty easy investment. Their index funds are around a lot now. There's a lot of different companies that do them. Simple stat. If you were to put away $500 a month from 1990 to the year 2020, then you would have put away 180 grand, that'd be worth $700,000 now. Average rate of return of 7.5 % per year over the last 30 years. That's where you get those amplified returns compared to where savings is right now. Is it risky? Yes. Is it volatile? Yes. But those numbers I gave you are based on that per year average over time. You might have one year it's up 20 %, one year it's down 10 %, one year it's up 3 %, next year it's down 2 %, then it's up 10 %, you average it out, it's averaged about 75 % on average per year.
Tom Gleeson
Do you mitigate that risk by investing? Because that's a relatively long period of time. That's 30 years. Do you mitigate that risk by parking the money there, plus your regular contributions for that period of time? So you have a market downturn. But if you're in it for 30 years, you're going to bounce back.
Stefan Angelini
Yeah, because you go with the market cycles. That's the thing. And Vanguard have amazing charts on this that if you invested 10 grand today or 500 bucks a month, and you just stayed invested, you just kept going. You didn't change your strategy at all. You didn't pull money out. Where would your money be? T hat's where I got those numbers from. Not wavering from the strategy, just putting it away. But it's a great little thing. The next one is if you invested, as I said, 10 grand. So if you start with 10 grand, when it comes to investing, if you can start with a higher lump sum, you got the benefit of compound returns over time. So if you were to invest 10 grand for a kid in 1990.
Tom Gleeson
This is without the regular top up contributions, just 10 grand flat.
Stefan Angelini
It is 10 grand flat. Yeah.
Stefan Angelini
That would have grown to $94,000.
Tom Gleeson
The second time period, 1990 to 2020.
Stefan Angelini
Yeah.
Tom Gleeson
Yeah. Okay.
Stefan Angelini
I think so.
Tom Gleeson
Significant when you compare that against the cash account.
Stefan Angelini
Yeah. Yeah. Yeah. That's right. So you can make returns, right? But if you hold on there for 30 years, you can see there's a big difference. But then if you've got 10 grand that turns it to 94, and then you've got to give that $94,000 to the kid, you got to sell the shares or you transfer the shares and say you deal with it now. Someone's going to pay tax on that $84,000 because the government's not going to let you walk away.
Tom Gleeson
It's a backhanded present.
Stefan Angelini
Yeah. The ATO is going to go, Well, someone's made money here. Someone's made money. That means someone owes us money. Who's going to give it to? And it's probably going to be you as a parent not wanting to make your kid pay tax on it. Or if you've got to pay tax on it, let's say you're on the highest marginal tax rate, take 23 % away from that gain. $84,000, let's say, you're going to pay 20 grand in taxes. Your kid's only getting $64,000 $74,000 out of the total of 94, it would have become. It's a 20 grand hit. Meaning your average return isn't that great?
Tom Gleeson
It's worth considering when you set it up when you invest in the beginning. How is this going to play out?
Stefan Angelini
Yeah, exactly right. You got to focus on that long term. When it's for the kids, for the kid's benefit, what's it for? Am I going to give them the money? Is it going to go towards education? Either way, whatever it's for, it's going to be a tax event when you try and get access to that money. How do you plan for that? Most of us, as time goes on, we make more money, and therefore, our tax rate is going to be higher as we get older and earn more money. That's when you diminish a lot of the returns you've got when you pay tax.
Tom Gleeson
What about a scenario where someone looks at that and goes, You know what? Too hard. I don't want to try to read the market. Let's just buy. Let's just go property. Then in time, you hand over to the property or you sell it and you hand over the gift to the kids.
Stefan Angelini
It's a tough one. When you want to buy property, there's two people that want their money. The state revenue office wants stamp duty. And if you sell a property, the ATO, and it's not your home, the ATO wants their capital gains tax because that's where they get their revenue. Revenue number one is tax and revenue number two is stamp duty. They're going to try and get it no matter what. We get a lot of questions saying, I want to buy a property for my kids, keep it there because it's going to be so hard for them to enter the property market because property prices keep going up. Ever since the 1970 properties doubled every 10 years. Well done to the Italian migrants that came here buying property.
Tom Gleeson
It's so bad on the back. For your community.
Stefan Angelini
It's just what they did. It's like, Oh, well, we're not buying anything else. We're just buy property. Yeah. Okay, save, save, save, save and buy. It's been a really great asset class. Now people are getting more. The kids aren't going to be able to afford a home.
Tom Gleeson
Makes sense in theory. I'll buy it now because it'd be so much cheaper than them trying to buy it in the future.
Stefan Angelini
Yeah, but what do you need to buy property now? You need heaps of cash. If you haven't got heaps of cash to buy the property out, right, you take on debt, it's not going to be a home. So it's going to be in classes and investment. That means you've got to then maintain that property. If you're borrowing a heaps of debt at the moment, you're going to have a negative cash flow, most likely on the property, and therefore you're forking money into it to maintain this thing for your kid's future. That's fine. It's a regular investment plan. Awesome. You want the asset to then go up. But then what happens on the transfer?
Tom Gleeson
Someone owes. Someone's money.
Stefan Angelini
Someone's going to owe someone's money. That's right. You've got if you own individual names and that's when you've got a property. The parent. The parent. Yes. Let's say me and you were a couple, we own the property in joint names. Lucky me. Yeah. We're the property in joint names and then if we transfer that to the kid. Sro is going to go, Complete change of ownership. It was never for the entitlement of the kid. How are you going to prove it was?
Tom Gleeson
Yeah.
Stefan Angelini
We want your kid to pay the stamp duty on this transfer.
Tom Gleeson
Okay.
Stefan Angelini
Okay, that's fine. What about capital gains? Yeah. Now we're going to ask for capital gains too, because it's gone from your board of 500 grand, it's worth a million dollars. You can't just get away from that. But then we go, All right, so how do we try and negate at least one of them? So we say, But it's always going to be classed as an investment asset, and you can't put it in your kid's name because they can't get the lending, they can't get the owner, they're going to earn too much money, all that kind of stuff. What am I putting in the trust? What are the benefits of the trust? Or you can prove who the end beneficial owner is going to be. And if you can prove who the end beneficial owner is going to be, and who it's always held in benefit for, then you can sometimes, as long as you tick all the right boxes, you can get around stamp duty, paying stamp duty again, you can say, Well, this property was bought for that person, always for that person.
Tom Gleeson
Yeah.
Stefan Angelini
So if it ever has to get transferred out to become a principled place of residence, you may be able to get away from paying that extra stamp duty again.
Tom Gleeson
Yep. The trust structure allows you to establish from the beginning who it was designated for. It was always going to be for this.
Stefan Angelini
Yeah, exactly right. There's a lot of advice you got to get around it and how to improve it. But there are specific sections in the Land Duties Act that that specifically explains if it's for this purpose and it goes to this person, don't worry about paying stamp duty.
Tom Gleeson
Yeah. Okay.
Stefan Angelini
That's where we sort of... But what's the other thing that one? The ATO. The ATO wants the money. So if the ATO wants capital gains, what do you think? If I own the asset, it's always been for this person, we're now transferring them property to that person. We're paying capital gains. We're paying capital gains. The ATO, they would go, That's cool. Sro don't care. That's fine. That's my ugly sister. We want our money.
Tom Gleeson
Okay.
Stefan Angelini
So the ATO is going to ask for their tax. So if you go, Right, all right. I've held this asset for 20 years. It might have gone up. Let's say it's gone up double. You bought it for 500, it's worth a million dollars. 250 grand of that is going to go directly onto your tax return. You get a 50% discount. You get to determine who actually gets the tax bill because I'm through a trust. You get to determine who gets the tax bill. Then someone's going to have to foot the bill.
Tom Gleeson
There's wiggle room on the stamp duty, but CGT is guaranteed.
Stefan Angelini
The property is still got debt, you're changing ownership. The bank's going to go, Who's going to take over the debt? Can you prove this person can service that debt? It creates complexities down the track.
Tom Gleeson
Yeah. Okay.
Stefan Angelini
It's a great strategy.
Tom Gleeson
But you've got to be aware of what you're getting into. It sounds like you've got to know how to set it up in the beginning and what's going to happen at the end when you transfer, when you sell.
Stefan Angelini
Yeah, it's right because it's all good to have a fantastic idea.
Tom Gleeson
Yeah.
Stefan Angelini
But when then when it comes time to exit and you then hit a brick wall and you go, This is all too hard. What do I do this in the end? And that's where a lot of people get to because they have a lot of planning at the start. And I said, you'll behold, the todd of being a financial planner is how are we going to plan for that exit? What's our strategy to get out?
Tom Gleeson
Yeah. Okay.
Stefan Angelini
Anyway, so a lot of people don't end up buying property for the end of the day. But it's like, even if you buy it and you own it and then you die and your kid gets the property, different situation.
Tom Gleeson
Yep.
Stefan Angelini
That's it.
Tom Gleeson
Harder to factor in the old death.
Stefan Angelini
Well, you just hold the asset forever. Do you ever want to sell it? No. Right. Great. Good strategy.
Tom Gleeson
What about one that we talk to a lot of clients about, particularly when it comes to, I want to have something to hand over to my kids. One that we discuss is investment bond, which is all often met with, What the hell is that?
Stefan Angelini
Investment bond has been becoming more popular and if I'm going to invest in my personal name, people say, Well, it's for my kids. It's for my kids benefit. I don't want to pay tax on it. I don't want to have to deal with the transfer at the end of the day. You got this special structure. It's called an investment bond, which now they're logged as their own tax return. So it's your investment, but it's not in your name. It's for an end benefit of, I'd say, a kid. There's special kinds of investment bonds called education bonds where these bonds pay tax internal over time, lower tax rate. And then you can get the tax back if you meet certain criteria under an education bond. But if you hold these investment bonds for a certain period of time, when you got to pull the money out, I spoke before about if you own a share, it goes up in value, transfer the money to your kids, you're going to pay capital gains tax.
Tom Gleeson
Yeah.
Stefan Angelini
Under these investment bonds, it's a tax paid structure. When you pull the money out, you don't pay capital gains tax. In some cases, you might actually get a discount on the tax when you pull it out, depending on when you do it. You pay a lower tax rate in or rather than your personal tax rate. You get it out and you can pull out capital gains tax free. As I said before, normally, you earn more money as you get older, which you become better at what you do. Therefore, there's less tax benefits on exit. Sorry, there's more tax benefits on exit.
Tom Gleeson
Yeah.
Stefan Angelini
And you can still invest your money.
Tom Gleeson
That's a true thing.
Stefan Angelini
With the savings.
Tom Gleeson
That's being cool with the investment bond.
Stefan Angelini
Yeah.
Tom Gleeson
Yeah. Okay.
Stefan Angelini
The question we always get is, Well, what's invested into? The answer is you can invest into it just like your super is invested. For example, there's a few other benefits of these structures, like estate planning. It's a non estate asset. What that means is it doesn't go into your will. If you said it's for your kid's benefit, but then you split from your partner and their ex husband wants access to that bond, say no, it doesn't form part of my estate if I die. It's for my kids. It negates any legalities to do with that because you've got an end beneficiary there. There's a few other cool things about it, but the real crux of it is it's invested, make a long term returns, and it's an easy tax situation to have to worry about. The tax at the end of the day is not going to be an issue. That's why it's growing in popularity.
Tom Gleeson
And you've established from the beginning, what is? Who it's designated for? What the purpose of it is? In a way that can't be contested and you can invest in the meantime.
Stefan Angelini
Yeah.
Tom Gleeson
Over that period of the numbers we're at before, potentially 30 years.
Stefan Angelini
Potentially 30 years. Yeah. Let's run some numbers. Yes, let's run some numbers. You got your computer there. We're going to show you just quickly if you were to invest. Start with 10 grand. You're going to put 10 grand into a savings account? I'm going to put in 100 bucks a month for 20 years. The effect of compound of return, so the money growing on itself. So put in a return rate, say average of 3% savings rate?
Tom Gleeson
3%, cool.
Stefan Angelini
Yep. The money keeps earning money on itself. What does that come out of?
Tom Gleeson
Initial deposit, 10 grand. Regular deposits, we chipped in 24,000 and..
Stefan Angelini
You would have made 17 on that offer.
Tom Gleeson
Sorry, for a total of 51.
Stefan Angelini
Your 34 grand invested over 20 years becomes 51. It's cool. What about if you made a 5% return? There's 5% return, you might save the more defensive investment portfolio. Got some bonds in there.
Tom Gleeson
We're now looking at 68,000. All right, so 10,000 initial investment with regular deposits of 24,000.
Stefan Angelini
Instead of your 34 becoming 51, your 34 grand investment becomes 68 grand. That's pretty good. What about 7% return? So if you look at a 7% return.
Tom Gleeson
Cheer.
Stefan Angelini
Your 34 grand becomes $92,000. And that's it. So it doesn't go by the same amount. If you're making that 7% per year, you're making 7% on the 7% on the 7%. So that's why it amplifies your end result. And that's where a lot of people say, Why don't we start investing as soon as possible? And why don't we take money, put in extra money if we can, to enable that to grow further?
Tom Gleeson
So what did we just run? 3, 5, and 7% and 3, 5 , 7, roughly 51, 68,000 and 92,000.
Stefan Angelini
That's right.
Tom Gleeson
Yeah.
Stefan Angelini
So the first difference was 17 grand. And then the next difference was 92 takes 68 or 24. So you could see it starts to grow.
Tom Gleeson
It's worth a little bit. Well, it's worth stretching at the beginning. Get as much in as you can in the beginning. Yeah.
Stefan Angelini
But if you start with 10 grand, it'd be a lot lower. The end return will be a lot lower. So start with higher amounts if you can. What are the main takeouts we can get from this?
Tom Gleeson
For.
Stefan Angelini
Investing for your kid's future?
Tom Gleeson
Know what you're getting into in the beginning, plan for what's going to happen at the end. The only other one would be, do you want to pick a favorite out of all we discuss? Or is it horses for courses?
Stefan Angelini
I'm picking a paper that'd be giving financial advice. Everyone's different.
Tom Gleeson
That's a test you passed.
Stefan Angelini
Know your risk profile, understand the exit and what's going to happen when you want to eventually give the money to your kid and understand it. Do you want to take risk and try and target a higher rate of return for your kids? And therefore, you can pick what's going to be the best way to grow that investment portfolio for your kid's future.
Tom Gleeson
Very good.
Stefan Angelini
Good stuff. All right, Tommy, we're done.
Tom Gleeson
All right, good to be back. We'll see you again soon.
Stefan Angelini
Thanks all for listening. See you.
Tom Gleeson
Cheers.
Stefan Angelini
Bye.
Tom Gleeson
G'day, everyone. Welcome back to the Real Wealth podcast. We're back after a busy June. Welcome, Stefan Angelini and back today to talk about investing for your kids future. Principally, why? Well, the why is twofold. Because. It'd be a wonderful feeling down the line to be able to hand off a gift to your kids and say, I saved diligently, I planned ahead, and here is something. But also the why incorporates the different financial vehicles that you can use to do so. So on that, we're going to talk today, just just a bit of a forecast of what we're going to chat about savings account versus share portfolio against property and finally investment bond. So there are advantages and disadvantages. But before we do that, do you want to cover off the disclaimer?
Stefan Angelini
Hey guys, Stefan here. Just letting you know this is all just general advice. Please don't consider as personal advice. And if you want any personal advice, go and consult your licensed financial advisor. We're going to talk about structures, tax structures. We won't talk about specific investments. And did you know cash and savings isn't actually considered an investment anymore?
Tom Gleeson
Really?
Stefan Angelini
No, it's just a savings vehicle. So like..
Tom Gleeson
Okay.
Stefan Angelini
Yeah, we have to write advice on it, which is not what you have to do.
Tom Gleeson
It's the classification of it.
Stefan Angelini
Which is a pain in the backside.
Tom Gleeson
Yeah, it's very good.
Stefan Angelini
That's where I'll go. Yeah, it's easy that way. That is the default, and that's what my parents did, and that's what my grandparents did. If you look back in the day when they actually did that, interest rates were a lot higher.
Tom Gleeson
Yeah.
Stefan Angelini
Good stuff. All right.
Tom Gleeson
First off, when it comes to investing for your kid's future, a lot of people would default to, without much of a plan, just savings account. Fair to say? I'm just squirreling money away. I'm just putting money away.
Tom Gleeson
If you ever heard of someone that was born in the 60s talk about their interest rates, when they bought their first house, they'll tell you about just how high the interest rates were. You had 18%, 21%. Now, you could imagine that if interest rates on home loans were that high, then you could get quite a lot of interest on your savings accounts. So if you're just putting money away for the next generation because you had no debt on your home and that was getting 15%, well, that's a great return. Well, over time, that's where it was. So if you look at the graph of where interest rates have come, and that's where your interest and your savings is sort of pegged to where the Reserve Bank have their cash rate. At the moment, it's 4.1%, so that's why you're seeing these high interest savings account at 4.5%. They're floating around.
Tom Gleeson
Yeah
Stefan Angelini
But now, things changed. Over the last 10, 12 years, interest rates have come right down to barely nothing. People have been up in arms because it's increased to 4.1%, but it was there 10 years ago.
Tom Gleeson
Yeah. Okay.
Stefan Angelini
Now, you're getting okay savings rates, nothing like it used to be. But still, it's not a better return than if you were in other markets long term. But what is it? Safe. Yeah, okay. Not volatile. Low risk, low reward. Yeah, that's it. If you want to put money away for your kids and you just want to make sure they actually get it, that might be the best option.
Tom Gleeson
Yeah, guarantee they're getting a modest amount rather than risking it for a greater amount.
Stefan Angelini
Yeah, exactly right. That sort of comes to the position of, if you've got a home loan, normally you have kids and a lot of people have a home loan and they have an offset account. And if you go, right, I'm going to put money in savings for my kids, and that savings account is going to earn 3%, and then you're going to pay tax in that 3%, or do I put it in my mortgage account or offset account, and it's going to offset my loan, which I'm paying 5% on. So you're saving 5% versus earning 3%. The issue with earning 3% is you pay tax on that 3%, pay tax at your marginal tax rate, unless you've got it in the kid's name. And then how much can your kids earn? This is where kids tax rates come into effect. Kick it on the earn up to $416 a year before they start getting taxed.
Tom Gleeson
Kid, as in 18, under 18?
Stefan Angelini
Under 18.
Tom Gleeson
Yeah.
Stefan Angelini
So they can start getting taxed pretty heftily. And then after 1,000 bucks or so, it comes down to 47%. So it's not advantageous to give your kids heaps of money.
Tom Gleeson
They know.
Stefan Angelini
Yeah, that's right.
Tom Gleeson
Yeah. Okay.
Stefan Angelini
And not if they're making a lot of interest. Just a little bit, it's all right.
Tom Gleeson
So does that mean in summary, probably not a bad call from your parents and your grandparents, given the context, given the interest rate at the time? However, current climate, not your best option.
Tom Gleeson
Yeah. Savest, maybe, but not the best.
Stefan Angelini
Savest. Savest. And if that's your personality, you just want safety, then great. Yeah. Awesome. So that.
Tom Gleeson
Leads us to another option that would be looked at by a lot of parents wanting to save their kids is investing in shares. So take that money rather than just sit in a savings account, let's invest it a little bit more aggressively. Take on higher risk, higher reward. How does that play out?
Stefan Angelini
It's all about whose name it goes into the issues of holding it, who earns the dividends. First off, how do you get the money to your kid? It's all good to earn a return, but how do you get the money to your kid? Do you have the asset in their name? Do you have the asset in your name? Who earns the dividends on it? If you declare dividends in your tax return, then technically it's your asset, even if you've got the rest of your kids. But if you say the kids own the dividends and it can be the kids, you can give them the shares in the long term. But let's say that you own a stock or an index and you hold it for 20 years and you say it's on behalf of your kid, but you declare dividends in your tax return. Because you want the franken credits and then you got to transfer it to your kid, you're probably going to have a capital gain event.
Tom Gleeson
Okay. So that's a shame. That's a shame setting it up in their name in the first place.
Stefan Angelini
Yeah. So if you buy a specific stock for, say, $10, it goes to $30, and you have got a capital gain event of $20 on the individual change on the stock. You can be in a lot of stride when it comes down to transfer.
Tom Gleeson
The kid's going to inherit the shares. The kid's also going to inherit the CGT.
Stefan Angelini
Well, the parent has to pay the tax. Oh, their tax. Yeah. The ATO will catch you up eventually because when do a name transfer, it's changed ownership. Unless you can prove it's always been beneficial, the kid has always been the beneficial owner. They've always had the entitlement to it, then you're right. Otherwise, it's tough, but you can get decent returns.
Tom Gleeson
Better return through a simple cash account?
Stefan Angelini
Yeah. I'll give you an example. What's an index fund we can use? Asx200? Asx200. Top 200 companies in Australia, weighted by market cap, pretty easy investment. Their index funds are around a lot now. There's a lot of different companies that do them. Simple stat. If you were to put away $500 a month from 1990 to the year 2020, then you would have put away 180 grand, that'd be worth $700,000 now. Average rate of return of 7.5 % per year over the last 30 years. That's where you get those amplified returns compared to where savings is right now. Is it risky? Yes. Is it volatile? Yes. But those numbers I gave you are based on that per year average over time. You might have one year it's up 20 %, one year it's down 10 %, one year it's up 3 %, next year it's down 2 %, then it's up 10 %, you average it out, it's averaged about 75 % on average per year.
Tom Gleeson
Do you mitigate that risk by investing? Because that's a relatively long period of time. That's 30 years. Do you mitigate that risk by parking the money there, plus your regular contributions for that period of time? So you have a market downturn. But if you're in it for 30 years, you're going to bounce back.
Stefan Angelini
Yeah, because you go with the market cycles. That's the thing. And Vanguard have amazing charts on this that if you invested 10 grand today or 500 bucks a month, and you just stayed invested, you just kept going. You didn't change your strategy at all. You didn't pull money out. Where would your money be? T hat's where I got those numbers from. Not wavering from the strategy, just putting it away. But it's a great little thing. The next one is if you invested, as I said, 10 grand. So if you start with 10 grand, when it comes to investing, if you can start with a higher lump sum, you got the benefit of compound returns over time. So if you were to invest 10 grand for a kid in 1990.
Tom Gleeson
This is without the regular top up contributions, just 10 grand flat.
Stefan Angelini
It is 10 grand flat. Yeah.
Stefan Angelini
That would have grown to $94,000.
Tom Gleeson
The second time period, 1990 to 2020.
Stefan Angelini
Yeah.
Tom Gleeson
Yeah. Okay.
Stefan Angelini
I think so.
Tom Gleeson
Significant when you compare that against the cash account.
Stefan Angelini
Yeah. Yeah. Yeah. That's right. So you can make returns, right? But if you hold on there for 30 years, you can see there's a big difference. But then if you've got 10 grand that turns it to 94, and then you've got to give that $94,000 to the kid, you got to sell the shares or you transfer the shares and say you deal with it now. Someone's going to pay tax on that $84,000 because the government's not going to let you walk away.
Tom Gleeson
It's a backhanded present.
Stefan Angelini
Yeah. The ATO is going to go, Well, someone's made money here. Someone's made money. That means someone owes us money. Who's going to give it to? And it's probably going to be you as a parent not wanting to make your kid pay tax on it. Or if you've got to pay tax on it, let's say you're on the highest marginal tax rate, take 23 % away from that gain. $84,000, let's say, you're going to pay 20 grand in taxes. Your kid's only getting $64,000 $74,000 out of the total of 94, it would have become. It's a 20 grand hit. Meaning your average return isn't that great?
Tom Gleeson
It's worth considering when you set it up when you invest in the beginning. How is this going to play out?
Stefan Angelini
Yeah, exactly right. You got to focus on that long term. When it's for the kids, for the kid's benefit, what's it for? Am I going to give them the money? Is it going to go towards education? Either way, whatever it's for, it's going to be a tax event when you try and get access to that money. How do you plan for that? Most of us, as time goes on, we make more money, and therefore, our tax rate is going to be higher as we get older and earn more money. That's when you diminish a lot of the returns you've got when you pay tax.
Tom Gleeson
What about a scenario where someone looks at that and goes, You know what? Too hard. I don't want to try to read the market. Let's just buy. Let's just go property. Then in time, you hand over to the property or you sell it and you hand over the gift to the kids.
Stefan Angelini
It's a tough one. When you want to buy property, there's two people that want their money. The state revenue office wants stamp duty. And if you sell a property, the ATO, and it's not your home, the ATO wants their capital gains tax because that's where they get their revenue. Revenue number one is tax and revenue number two is stamp duty. They're going to try and get it no matter what. We get a lot of questions saying, I want to buy a property for my kids, keep it there because it's going to be so hard for them to enter the property market because property prices keep going up. Ever since the 1970 properties doubled every 10 years. Well done to the Italian migrants that came here buying property.
Tom Gleeson
It's so bad on the back. For your community.
Stefan Angelini
It's just what they did. It's like, Oh, well, we're not buying anything else. We're just buy property. Yeah. Okay, save, save, save, save and buy. It's been a really great asset class. Now people are getting more. The kids aren't going to be able to afford a home.
Tom Gleeson
Makes sense in theory. I'll buy it now because it'd be so much cheaper than them trying to buy it in the future.
Stefan Angelini
Yeah, but what do you need to buy property now? You need heaps of cash. If you haven't got heaps of cash to buy the property out, right, you take on debt, it's not going to be a home. So it's going to be in classes and investment. That means you've got to then maintain that property. If you're borrowing a heaps of debt at the moment, you're going to have a negative cash flow, most likely on the property, and therefore you're forking money into it to maintain this thing for your kid's future. That's fine. It's a regular investment plan. Awesome. You want the asset to then go up. But then what happens on the transfer?
Tom Gleeson
Someone owes. Someone's money.
Stefan Angelini
Someone's going to owe someone's money. That's right. You've got if you own individual names and that's when you've got a property. The parent. The parent. Yes. Let's say me and you were a couple, we own the property in joint names. Lucky me. Yeah. We're the property in joint names and then if we transfer that to the kid. Sro is going to go, Complete change of ownership. It was never for the entitlement of the kid. How are you going to prove it was?
Tom Gleeson
Yeah.
Stefan Angelini
We want your kid to pay the stamp duty on this transfer.
Tom Gleeson
Okay.
Stefan Angelini
Okay, that's fine. What about capital gains? Yeah. Now we're going to ask for capital gains too, because it's gone from your board of 500 grand, it's worth a million dollars. You can't just get away from that. But then we go, All right, so how do we try and negate at least one of them? So we say, But it's always going to be classed as an investment asset, and you can't put it in your kid's name because they can't get the lending, they can't get the owner, they're going to earn too much money, all that kind of stuff. What am I putting in the trust? What are the benefits of the trust? Or you can prove who the end beneficial owner is going to be. And if you can prove who the end beneficial owner is going to be, and who it's always held in benefit for, then you can sometimes, as long as you tick all the right boxes, you can get around stamp duty, paying stamp duty again, you can say, Well, this property was bought for that person, always for that person.
Tom Gleeson
Yeah.
Stefan Angelini
So if it ever has to get transferred out to become a principled place of residence, you may be able to get away from paying that extra stamp duty again.
Tom Gleeson
Yep. The trust structure allows you to establish from the beginning who it was designated for. It was always going to be for this.
Stefan Angelini
Yeah, exactly right. There's a lot of advice you got to get around it and how to improve it. But there are specific sections in the Land Duties Act that that specifically explains if it's for this purpose and it goes to this person, don't worry about paying stamp duty.
Tom Gleeson
Yeah. Okay.
Stefan Angelini
That's where we sort of... But what's the other thing that one? The ATO. The ATO wants the money. So if the ATO wants capital gains, what do you think? If I own the asset, it's always been for this person, we're now transferring them property to that person. We're paying capital gains. We're paying capital gains. The ATO, they would go, That's cool. Sro don't care. That's fine. That's my ugly sister. We want our money.
Tom Gleeson
Okay.
Stefan Angelini
So the ATO is going to ask for their tax. So if you go, Right, all right. I've held this asset for 20 years. It might have gone up. Let's say it's gone up double. You bought it for 500, it's worth a million dollars. 250 grand of that is going to go directly onto your tax return. You get a 50% discount. You get to determine who actually gets the tax bill because I'm through a trust. You get to determine who gets the tax bill. Then someone's going to have to foot the bill.
Tom Gleeson
There's wiggle room on the stamp duty, but CGT is guaranteed.
Stefan Angelini
The property is still got debt, you're changing ownership. The bank's going to go, Who's going to take over the debt? Can you prove this person can service that debt? It creates complexities down the track.
Tom Gleeson
Yeah. Okay.
Stefan Angelini
It's a great strategy.
Tom Gleeson
But you've got to be aware of what you're getting into. It sounds like you've got to know how to set it up in the beginning and what's going to happen at the end when you transfer, when you sell.
Stefan Angelini
Yeah, it's right because it's all good to have a fantastic idea.
Tom Gleeson
Yeah.
Stefan Angelini
But when then when it comes time to exit and you then hit a brick wall and you go, This is all too hard. What do I do this in the end? And that's where a lot of people get to because they have a lot of planning at the start. And I said, you'll behold, the todd of being a financial planner is how are we going to plan for that exit? What's our strategy to get out?
Tom Gleeson
Yeah. Okay.
Stefan Angelini
Anyway, so a lot of people don't end up buying property for the end of the day. But it's like, even if you buy it and you own it and then you die and your kid gets the property, different situation.
Tom Gleeson
Yep.
Stefan Angelini
That's it.
Tom Gleeson
Harder to factor in the old death.
Stefan Angelini
Well, you just hold the asset forever. Do you ever want to sell it? No. Right. Great. Good strategy.
Tom Gleeson
What about one that we talk to a lot of clients about, particularly when it comes to, I want to have something to hand over to my kids. One that we discuss is investment bond, which is all often met with, What the hell is that?
Stefan Angelini
Investment bond has been becoming more popular and if I'm going to invest in my personal name, people say, Well, it's for my kids. It's for my kids benefit. I don't want to pay tax on it. I don't want to have to deal with the transfer at the end of the day. You got this special structure. It's called an investment bond, which now they're logged as their own tax return. So it's your investment, but it's not in your name. It's for an end benefit of, I'd say, a kid. There's special kinds of investment bonds called education bonds where these bonds pay tax internal over time, lower tax rate. And then you can get the tax back if you meet certain criteria under an education bond. But if you hold these investment bonds for a certain period of time, when you got to pull the money out, I spoke before about if you own a share, it goes up in value, transfer the money to your kids, you're going to pay capital gains tax.
Tom Gleeson
Yeah.
Stefan Angelini
Under these investment bonds, it's a tax paid structure. When you pull the money out, you don't pay capital gains tax. In some cases, you might actually get a discount on the tax when you pull it out, depending on when you do it. You pay a lower tax rate in or rather than your personal tax rate. You get it out and you can pull out capital gains tax free. As I said before, normally, you earn more money as you get older, which you become better at what you do. Therefore, there's less tax benefits on exit. Sorry, there's more tax benefits on exit.
Tom Gleeson
Yeah.
Stefan Angelini
And you can still invest your money.
Tom Gleeson
That's a true thing.
Stefan Angelini
With the savings.
Tom Gleeson
That's being cool with the investment bond.
Stefan Angelini
Yeah.
Tom Gleeson
Yeah. Okay.
Stefan Angelini
The question we always get is, Well, what's invested into? The answer is you can invest into it just like your super is invested. For example, there's a few other benefits of these structures, like estate planning. It's a non estate asset. What that means is it doesn't go into your will. If you said it's for your kid's benefit, but then you split from your partner and their ex husband wants access to that bond, say no, it doesn't form part of my estate if I die. It's for my kids. It negates any legalities to do with that because you've got an end beneficiary there. There's a few other cool things about it, but the real crux of it is it's invested, make a long term returns, and it's an easy tax situation to have to worry about. The tax at the end of the day is not going to be an issue. That's why it's growing in popularity.
Tom Gleeson
And you've established from the beginning, what is? Who it's designated for? What the purpose of it is? In a way that can't be contested and you can invest in the meantime.
Stefan Angelini
Yeah.
Tom Gleeson
Over that period of the numbers we're at before, potentially 30 years.
Stefan Angelini
Potentially 30 years. Yeah. Let's run some numbers. Yes, let's run some numbers. You got your computer there. We're going to show you just quickly if you were to invest. Start with 10 grand. You're going to put 10 grand into a savings account? I'm going to put in 100 bucks a month for 20 years. The effect of compound of return, so the money growing on itself. So put in a return rate, say average of 3% savings rate?
Tom Gleeson
3%, cool.
Stefan Angelini
Yep. The money keeps earning money on itself. What does that come out of?
Tom Gleeson
Initial deposit, 10 grand. Regular deposits, we chipped in 24,000 and..
Stefan Angelini
You would have made 17 on that offer.
Tom Gleeson
Sorry, for a total of 51.
Stefan Angelini
Your 34 grand invested over 20 years becomes 51. It's cool. What about if you made a 5% return? There's 5% return, you might save the more defensive investment portfolio. Got some bonds in there.
Tom Gleeson
We're now looking at 68,000. All right, so 10,000 initial investment with regular deposits of 24,000.
Stefan Angelini
Instead of your 34 becoming 51, your 34 grand investment becomes 68 grand. That's pretty good. What about 7% return? So if you look at a 7% return.
Tom Gleeson
Cheer.
Stefan Angelini
Your 34 grand becomes $92,000. And that's it. So it doesn't go by the same amount. If you're making that 7% per year, you're making 7% on the 7% on the 7%. So that's why it amplifies your end result. And that's where a lot of people say, Why don't we start investing as soon as possible? And why don't we take money, put in extra money if we can, to enable that to grow further?
Tom Gleeson
So what did we just run? 3, 5, and 7% and 3, 5 , 7, roughly 51, 68,000 and 92,000.
Stefan Angelini
That's right.
Tom Gleeson
Yeah.
Stefan Angelini
So the first difference was 17 grand. And then the next difference was 92 takes 68 or 24. So you could see it starts to grow.
Tom Gleeson
It's worth a little bit. Well, it's worth stretching at the beginning. Get as much in as you can in the beginning. Yeah.
Stefan Angelini
But if you start with 10 grand, it'd be a lot lower. The end return will be a lot lower. So start with higher amounts if you can. What are the main takeouts we can get from this?
Tom Gleeson
For.
Stefan Angelini
Investing for your kid's future?
Tom Gleeson
Know what you're getting into in the beginning, plan for what's going to happen at the end. The only other one would be, do you want to pick a favorite out of all we discuss? Or is it horses for courses?
Stefan Angelini
I'm picking a paper that'd be giving financial advice. Everyone's different.
Tom Gleeson
That's a test you passed.
Stefan Angelini
Know your risk profile, understand the exit and what's going to happen when you want to eventually give the money to your kid and understand it. Do you want to take risk and try and target a higher rate of return for your kids? And therefore, you can pick what's going to be the best way to grow that investment portfolio for your kid's future.
Tom Gleeson
Very good.
Stefan Angelini
Good stuff. All right, Tommy, we're done.
Tom Gleeson
All right, good to be back. We'll see you again soon.
Stefan Angelini
Thanks all for listening. See you.
Tom Gleeson
Cheers.
Stefan Angelini
Bye.
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