Join our investing community

Kids!

Discussion in 'General Investing Discussion' started by mumeco, 13th Jun, 2008.

  1. mumeco

    mumeco Active Member

    Joined:
    2nd Apr, 2008
    Posts:
    31
    Location:
    NSW
    What is the best vehicle to use to provide for a kids education?

    Assume I have a tax rate of 31.5% and hubby is on highest tax bracket.

    Would it be...
    1. Getting redraw facility on mortgage of PPOR and using that when needed, putting all savings into mortage in the meantime. I worry about the effect of inflation, so uni fees may cost more than the mortgage is worth at some point in the future.
    2. Starting a Lifeplan education scheme (which purports to have tax benefits if you are on highest tax bracket) which is managed funds in a way, but limited to education purposes
    3. Investing in something (?managed funds) and drawing income from that? A couple of financial planners have suggested this. We could gear it, but what if stockmarket crashes again and we need the income at that time?
    I have some managed funds already and am a buy and hold kind of person at the moment, but the income from that is nowhere near school fees level.

    4. a cash management account

    Thoughts?
    I still need a financial planner....;)
     
  2. tailcat

    tailcat Well-Known Member

    Joined:
    18th Jun, 2007
    Posts:
    96
    Location:
    Yeppoon
    Your financial freedom!

    Assuming your kids are quite young at the moment, they won't notice the sacrifices needed to get started.

    As they get older, include them in your planning and dreaming. Ask them what they would like to do when you are all millionaires? Ask them to design their dream house if you plan to build your future ideal PPOR.

    Plan to establish a portfolio for each child before they go to uni. It will put a whole different perspective on their studies. Do go they still want to go uni? However, take care about gold-diggers......

    Having a general source of finance is probably the best way to pay for things like education not specific allocations for each segment of your life.

    Just something to ponder......


    Tailcat
     
  3. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    Hi Mumeco,

    1. Maybe, you'd have to calculate all the variables.
    2. Investment Bonds have more flexibility than Education Bonds, do a quick search as another thread has some information about these investments. These have 0% CGT if you keep the fund for more than 10 years!
    3. Yes. What's your risk profile? If you don't feel comfortable with gearing then follow your gut instinct.
    4. Your probably better off in a term deposit as they are paying 2% above CMA/CMTs at the moment and you don't need the money for a while.

    I definitely agree, you should see a financial planner.

    Cheers,

    Dan

    PS Before making an investment decision speak to an FPA registered Financial Planner.
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    A trust is a good way to go from a tax planning point of view down the track, since you can stream some of the income to each child ($420 tax free per year), which is a good start - especially if you reinvest that money.

    Naturally this isn't the most tax effective (bonds as previously mentioned are better), but with a trust you get the flexibility to invest in a range of assets and use your discretion for how the money is subsequently allocated.

    The idea of setting aside some money solely for a single purpose a fair way in the future is a nice idea - but I'm a bit more pragmatic about things and I prefer to retain flexibility of having access to the funds if something major happens (and assuming I have the discipline to actually keep that money invested and not just spend it).

    My approach to flexibility is that there's no point in having your children get the best education if you can't afford to pay for the corrective surgery after the unexpected accident to give them a better quality of life - or indeed if you are all destitute and living in the park - but your kids get to go to a swank private school!

    Depending on timing, I would tend to stick with shares or managed funds, or perhaps real estate as an investment - and then as you get closer to the time you are likely to need the money, progressively liquidate assets as required (spread it out over several years to minimise CGT too), and convert them to cash. If you are 5 years out and the market crashes, you hopefully have time to recover, but you want to protect as much as possible if you are only 1 or 2 years out.

    Perhaps a mix of assets including cash?
     
  5. mumeco

    mumeco Active Member

    Joined:
    2nd Apr, 2008
    Posts:
    31
    Location:
    NSW
    Trusts

    Can I ask about a trust - do you mean set up a trust for our son and then get him to pay the education fees from the trust? I'm thinking that this way we could have a number of different investments within the trust and use them as needed.

    But an official trust seems to be quite complicated to set up & administer especially without financial knowledge. I am afraid of stuffing it up totally.
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    Nope - you would set up and run the trust yourselves with you and your children as beneficiaries.

    Minors can't run a trust themselves and they can't receive any more than $420 each in distributions per year without paying ridiculous amounts of tax - so you'd need to be distributing anything above that level to yourselves each year and paying tax on it at your own marginal tax rate. Anything left over you can then reinvest.

    It's not ideal - but if one spouse is on a low income, the effective rate of tax is quite low.

    These bonds mentioned by AsxBroker (I don't know anything about them other than the vague concepts) are probably more tax effective, but with less flexiblity than a trust.

    If all you are going to do is accumulate cash or a few sharemarket investments, then a trust is likely to be overkill. However, if you use a trust as an integral part of your overall wealth management and protection strategy (where planning for your kids education is just one part of the larger strategy), then it may well be justified.
     
  7. DaveA

    DaveA Well-Known Member

    Joined:
    19th Feb, 2007
    Posts:
    617
    Location:
    Sydney, NSW
    Sim, the amount you can distribute to a child from a trust is now up around the $1600 per year..

    this is due to an increase in the low income earners tax rebate rather than moving the threshold