Investing for minors

Looking to set up a share trading account with myself as trustee and my infant son as a beneficiary. This is to enable the shares to be readily transferred to him when he turns 18.

Does a formal trust need to be set up with a trust deed etc? Or is simply providing my sons birth certificate to the share trading platform when setting up the 'minor trust' account enough?

 

You should be able to set it up without a trust deed, but I am not sure on the ID requirements. Just given them a call and ask.

What about the tax consequences?
Minors can only receive income of $416 pa tax fee, then the tax rate jumps to 66%

 

Thanks - I will give them a call.

Reading the below link at the ATO website, given no formal trust exists, I provide the money for the investments and make the investment decisions, I intend to quote my (the parents) TFN. Therefore tax will be at my marginal rate, not the child's.



Children's share investments

 

I've always been confused about this situation. From my reading there is no way to purchase shares for a child in such a way that when they come of age they have full control as if they are their shares.

Either the shares are in my name and need to be transferred later on, or in the child's name and taxed at the minor rate. The variations all seem to land in one or the other category.

I would love a way to do this, because I have 4 children and I want to be able to buy them shares so that they can watch it move, see the dividends and the re-investment and generally give them an opportunity to see compound growth in a meaningful manner.

Could I set up a trust for each child with myself as trustee and myself and them as beneficiaries, so that I can distribute the income to myself, then when they are older I can just make them the trustee and they are then in charge? Probably a waste of money noting the small amounts of money I am talking about.

 

It would be a formal trust - a bare trust.
If you are quoting your TFN that means there is no trust. The shares will be yours.

 

If a bare trust that would mean the child is the beneficial owner of the shares and you are the trustee. Once they hit 18 they can demand transfer of title - no CGT because no change in beneficial ownership.

As you are acting as trustee for the child they will be taxed.

To avoid this you could set up a discretionary trust, or 4 separate ones. Income will be taxed in the hands of who the trustee distributed it to, which could be yourself, or a bucket company. When the child reaches 18 you can change control of the trust to themselves. The bucket company could then distribute dividends, franked, to the adult child (antoher trustee as shareholder) and they could get the benefit of all the accumulated franking credits. No CGT on the change of trustee or appointment of director of the trustee company.

The discretionary trust route would be more costly though, but much more flexible.

However, the most simple way to do this would be to just keep investing in your name, pay off your main residence, debt recycle and then benefit them later on - could be an interest free loan to buy their main residence for example - which would be much more effective from an asset protection point of view considering family law.

And if you die before them you could leave them a large inheritance via a testamentary discretionary trust which will have huge tax advantages if they have kids or grandkids.

 

The below excerpt from the ATO link I provided earlier states that you quote the parents TFN in the situation where no formal trust exists and the parent is the trustee for the child.




If you quote a TFN, you pay taxes on the dividends when you lodge the tax return. If the shareholder is the:

• child, quote the child's TFN
• parent, as trustee for the child and
  • no formal trust exists, quote the parent's TFN
  • there is a formal trust, quote the trust's TFN.

 

I am not sure what you are pointing out. Where there is no trust the parent is buying for themselves in this situation.

 

Look at the examples the ATO gives in that link quoted above.

 

This is very confusing. The below example from the link above is the situation I want to replicate. This is where a minor trust account is set up to buy in my sons name, where I provide my TFN, and transfer the shares into his name CGT free when he turns 18.



Example 1

Peter withdraws $3,000 from his own bank account to buy shares in the name of his daughter Georgia.

He deposits the dividend of $200 into his own bank account and uses it for his own personal expenses.

Peter declares the $200 on his tax return. When he sells the shares, he will also declare any capital gain or loss.

 

This is not a trust relationship. Peter is acting in his own right so any transfer to Georgia will result in CGT being triggered.

If you want to avoid this you would act as trustee for the child, but then the child would be taxed as if they were the legal owner.

you can't have yourself taxed on the dividends and a CGT transfer to your son's name later.

 

Ah thank you for clarifying this for me.

When setting up the bare trust share account I will then quote my sons TFN and only purchase no/low dividend paying shares and ETFs. This will minimise income over the next 18 years to below the ~ $400 annual threshold.