Coming into some money..what to do..?

Discussion in 'Share Investing Strategies, Theories & Education' started by showmethemoney, 26th Feb, 2017.

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  1. showmethemoney

    showmethemoney Member

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    Hello Everyone

    I have an interesting scenario and i would like to hear peoples thoughts and ideas.

    I am married with 2 children under 5. We have a mortgage balance of 495k and a small credit card balance of 2.5k. We own our cars. We have 10k in a share portfolio mainly of lics set to drp. We have no savings currently as it was all used recently for the property deposit.

    It is odd that this is happening all at once, but this year I am going to inherit approx 150k and my wife approx 60k. This is not a massive amount, but its a pretty decent free kick, and we really want to make the most of it. I have 2 children below 5 and they will also inherit approx 150k each.

    The 3 year fixed term mortgage is 3.75% which is early in its first year (paying off approx 1.1k fortnightly) and we are only allowed to make 5k each year in extra repayments. Once this fixed term is up, the plan is to arrange a mortgage that will allow much more per year in extra repayments.

    The questions are what to do with the approx 210k my wife and I will receive, how best to invest the 150k each of my children will receive, and how to do all of the above the most tax effective way and also in a way to help reduce interest payments paid to the bank.

    My early thoughts for the 210k are:

    Mortgage = 75k. 3 years of 5k, then 60k in one hit. This will save loads of interest.

    Property Investment = 35k. Purchase price of approx 350k - 400k. Unsure if we'd need 20% deposit though since it'd be an investment loan.?

    Home Improvements = 30k. water tanks, solar, roofing, gates, fencing, painting

    Savings = 25k. Just so we have some savings.

    Stocks = 20k. Highly likely to purchase more lic set to drp.

    holidays for 2-3 years = 15k

    credit card = 3k

    left over = 7k to be used wisely, invested etc

    My early thoughts for the 150k each for the 2 children are:

    Savings = 50k. Concerns about receiving interest (income) and therefore tax liability

    Stocks = 100k. Concerns about receiving dividends (income) and therefore tax liability. Can this be negated by setting all stocks to drp?

    My wife and I do not have an smsf, we have separate accounts. We would consider an smsf but our collective balance is only 110k, and im under the impression smsf's are not much good unless you have a minimum >200k to start with.

    We are in our mid 30's. In regards to the future and ability to create wealth from net earnings, we can we add 5k to each of our children's pot of investments each year for 15 years, make our mortgage repayments and add 20k to our own investments each year (whether that is directed to stocks or cash or property etc i am not sure)

    Really looking forward to hearing what people think about the above

    Thanks


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  2. Simon Hampel

    Simon Hampel Founder Staff Member

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    Welcome to InvestChat!

    Do you have an offset account facility on your loan? If so - park any surplus cash there in the short term until you decide what to do - will minimise the interest payments on the loan. If not - ask if your lender if you can add an offset account!

    Do you think you will ever move out of your home and keep it as an investment property? That might have an impact on whether paying down the loan is the best approach.

    If you don't think it is likely that it would ever become an investment property then paying down the debt is always a good minimal-risk plan - but that 3.75% interest rate is pretty sweet ... do you think you can get better returns investing the money elsewhere rather than paying down the loan?

    Either way - it looks like you've got a great opportunity to set yourselves up really well. Try to avoid the lure of spending it all on lifestyle!
     
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  3. Simon Hampel

    Simon Hampel Founder Staff Member

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    @Terryw ... @Strategic Wealth ... do you have anything to add on strategies for dealing with kids inheriting large sums of money from a tax perspective?
     
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  4. showmethemoney

    showmethemoney Member

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    Thanks Simon

    This home will become an investment property for us and we will move onto a bigger house, but not in the next 5 years, therefore the 30k in home improvements.

    We do have an offset account, i was thinking the same about parking the money there that is destined for the bulk repayments over 4 years

    I do think I can do better than 3.75%, yes
     
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  5. Simon Hampel

    Simon Hampel Founder Staff Member

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    Definitely use the offset account then - minimise the amount that you actually pay off your loan so that you can maximise your investment debt (and thus tax deductibility) when it eventually becomes an IP.

    The last thing you want to do is pay down your PPOR loan only to have to increase your non-deductible borrowings in the future when you buy a new PPOR.

    If you take money from the offset account to use for the deposit on your next PPOR, it won't impact on the deductibility of the interest on the old PPOR / now IP loan.

    Whatever you do, don't redraw money from your current loan for personal use - that will contaminate your loan and make things really messy for you when you eventually do move out.

    I look forward to some suggestions from our other members on how best to invest your money!
     
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  6. Hodor

    Hodor Well-Known Member

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    DRP will not negate the tax issue. Some LICs (such as AFI) offer a similar option called a dividend substitution share plan (dssp) which might be of interest, will possibly address the income issue at the expense of higher capital gains if they are ever sold. Do some reading on it
     
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  7. twisted strategies

    twisted strategies Well-Known Member

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    since the children are almost certain to generate a taxable income ( as unfair as it sounds )

    franking credits ( if paid ) will become important

    although looking deceptively simple ( but are not ) ETFs might be considered

    mainly on the logical of divs ( on ASX listed shares ) more likely to be 3 monthly AND offering DRP and ( usually franking )

    would 25% of the children's investment do OK in an index ( and physical share ) ETF

    i am looking at VLC and ILC if the market crashes ( the price is governed by NTA with near immediate adjustments to NTA ) i hold neither of these but will be looking to buy if a meltdown

    other choices target the ASX top 50 , top 100 and top 200

    ( this is for the crash in progress .... LICs will be slower to fall as the NTA will take time to calculate and advise )

    the logic is buy the top end of the market cheap , and let the recovery happen over time .

    please note i invest in LICs and ETFs each has usable strengths
     
  8. showmethemoney

    showmethemoney Member

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    the tax rules on unearned income for children are bonkers. both my children are certainly going to exceed $416 so I have to have a long term strategy in place.

    i note the earlier comments about drp not actually negating the tax issue. thanks. i have read up about this and learnt they are treated as if a cash dividend has been received, so thanks. i still like drp because my positions are always long and its good to not have broking fees. franking credits then become very important here (not that hey weren't already). any more thoughts form anyone on this ?

    in regards to etf's, i am not invested in any but i have investigated some in the past and wound up sticking to lics that were trading attractively in respect to nta. an asx top 50/100/200 would be a good choice it seems to me. could you explain a little more on the mention made of 3 monthly divs, drp and franking please? or just send me a good link to send me on the right track with that one
     
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  9. Hodor

    Hodor Well-Known Member

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    DSSPs are not treated as income and still acquire more shares in a very similar manner to DRPs.
    That's why I recommended looking at them more closely.
     
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  10. showmethemoney

    showmethemoney Member

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    yes im just reading about this currently
     
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  11. showmethemoney

    showmethemoney Member

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    the dssp at afi is certainly a good option. Ive been hunting about for other dssp but i do not find any.

    it also appears to me that investment bonds could be well worth a closer look. I know there are plenty out there and ive been reading up on the information provided by centuria. looks attractive.

    it actually transpires that I do not have an offset account. therefore, the plan is 5k per year on capital repayment then move into a mortgage with an offset & decent extra capital payments allowed. the funds that i would have parked in the offset are now requiring a plan.
     
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  12. Hodor

    Hodor Well-Known Member

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    Whitefield (WHF) is another LIC, they call theirs a Bonus Share Plan (BSP)
    Bonus Share Plan
     
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  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Have a read of s 102AG of ITAA36.
    Children can receive income generated by an inheritance and be charged adult rates of tax. You should get some good legal advice on this important section.
     
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  14. bundy1964

    bundy1964 Well-Known Member

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    Terry do you need a Testamentary Trust to get children taxed at adult rates?
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Not neseccarily. See s102AG itaa1936
     
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  16. Waimate01

    Waimate01 Well-Known Member

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    My daughter inherited a similar amount at a young age. Testamentary trust is your friend.

    For me, the tricky bit was the will just said "to be held in trust until of age", but there was no actual trust deed. Turns out this is ok, and just took a bit of going up the food chain with the bank explaining that trusts do not require actual trust deeds in order to exist.

    I would never presume to offer advice to someone without knowing their details, but if I did, I would say get an accountant, be sure you set up a bank account and comsec account properly for the kids trusts, and put their money in any two of MLT, ARG, AFI. For you, whack your $210k straight off your mortgage and keep your monthly payments as they are now. It will make a profound difference to your life going forward. Complete game-changer. Maybe put $10k to one side for a holiday and a new lounge suite, but that's all.
     
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  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    This would have been a bare trust - no flexibility and held for your daughter absolutely. The will itself is the trust deed.
     
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  18. Waimate01

    Waimate01 Well-Known Member

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    Exactly. The problem was the bank kept asking for a copy of the trust deed, and I'd hand them the will and say "see that sentence there..."

    For the original poster, the really thorny issue is a parenting one. If s/he does a halfway reasonable job investing on his kids behalf, they can reasonably expect to receive upwards of $500k each on their 18th birthday. Hopefully the terms of the will specified some other age. But in my case, 18 is the number. And it's all my daughters money - I have no say over it. This is a large amount of money to bestow on someone so young. I think there's great benefit in working crappy jobs to help pay for your first car, etc.

    Impecunity in one's late teens and early twenties is a useful governor on injudicious behaviour.
     
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