3 ways to give your kids a financial head start without the headache

When it comes to helping your children or grandchildren get a financial head start in life, there are many options available. However, your generosity could create tax issues down the track. Here are a few ways you could help give your kids a financial head start, preferably without putting your finances at risk.

Education

If you want to guarantee that money invested for a specific purpose in your child’s life is used for that intention, there are several ways to ensure this happens.

When you look around, there are plenty of investment products aimed squarely at helping parents save for education. Education funds are often referred to as “Education Savings Plans”. These funds can be set up to transfer to the child’s name at an age specified by you. Many charge minimal fees, and the money can be used to pay for books and uniforms, repay HECS debts, and even purchase musical instruments and lessons.

Alternatively, you may look at investment bonds. Investment bonds are a type of insurance policy primarily used as an investment vehicle. Available from a range of providers, investors can choose from a suite of underlying investments in much the same way as regular managed funds. Investment bonds shouldn’t be confused with interest-paying government or corporate bonds. They are a unique type of asset offering a range of advantages.

As a form of life insurance, if the owner dies, the proceeds will be paid directly to nominated beneficiaries. The money doesn’t go through the estate and can be paid out quickly. In addition, the proceeds are not taxable in the hands of the beneficiaries, even if the bond is less than 10 years old. Allowing for relevant tax rates, they may also be a good vehicle for saving for a child’s education or other long-term goal.

Home ownership

Due to the increasing difficulty faced by many young Australians in saving enough to afford their first home, assistance from family members is becoming more common. A facility is available that enables parents to help with the purchase at no direct cost to themselves. The “family guarantee” loan allows parents, or another family member, to use their own home as security on a portion of their child’s mortgage, generally to increase their deposit amount.

If you choose to act as a guarantor, be aware of the implications. For example, you may be responsible for the entire loan if your offspring cannot meet repayments. Or even worse, if they default on the loan and the lender sells the property at a loss, you may be at risk of losing your own home.

Another option that places less risk on your assets is to lend your child money to make their deposit. Combining a parent’s loan with the first homeowner grant can substantially impact the life of the mortgage.

Accessing tax breaks

Parents may be aware of the value spreading income across family members may have when it comes to tax time. But beware. The Australian Tax Office ensures money is not placed in children’s names, purely to give Mum and Dad a tax break. For this reason, it applies more aggressive tax rates for passive income invested in the name of a person under age 18. So, when setting up any investment in this way, make sure you check with your adviser first.

The key to giving your kids a leg-up is to have a clear objective before you start. With so many options available, it can get confusing, so be sure to ask us for professional advice.