Q&A: Investing a cash gift for a child in the share market October 9th, 2022
My parents recently received a reasonably large inheritance from my grandmother’s estate and rather than keep it for themselves, they wish to pass the funds onto myself and my siblings. We don’t really need the money ourselves and were thinking of using our share to set up an investment portfolio for our three children aged 6 months and 2 and 4 years old. We hope to invest for the long term and were thinking of a share portfolio or similar.
Are there any traps that we should be aware of and what do you think of this approach?
Can I get my question answered?
The first thing will be to ensure that your parents are not adversely affected by passing on the proceeds of the estate. If they are currently in receipt of a Centrelink age pension, such a distribution will be regarded as a deprivation or gift. Centrelink should have been notified of the distribution within 14 days and if they pass the money onto you, their assets will be reduced by $10,000 with the remaining amount of the gift will be included in the means testing system for 5 years. If they do not receive a pension, there is no issue with the gift.
The cleanest way to set up the investments will be to effectively set up 3 “bare trusts” for each of the children with you as the trustee. A bare trust does not need to be documented but empowers you to set up and operate investments for your children. Usually, it is as simple as opening an account with the child concerned nominated as the beneficiary or sometimes named as a joint owner of the account.
You can open an online share-trading account with most major online brokers. In this case, you nominate that the account is operating as a trust on behalf of the child who you can name. Some brokers have a specific checkbox for minors.
You can also obtain a Tax File Number for each child and that would make it even more clear that the account is for the benefit of the child and not you. This could become important later in life when the child reaches 18. At that age, they will be allowed to open their own account and the shares or investments can be transferred into their names.
Importantly, if you have derived no personal benefit from the ownership of these shares or investments (such as pocketing dividends or franking credits), then no Capital Gains Tax event will occur and they are effectively regarded as the original owner.
You may want to wait a few months for markets to settle, but you should then consider broad-based long-term investments such as an exchange-traded share fund. These offer low ongoing fees and good diversification.