Investment structure for a child

[MBSteve]

Hi everyone,

My daughter turns 5 next month and I want to start an ETF portfolio for her via Smart Shares, likely the NZ Top 50 option. The intention is to contribute $100 per month until she turns 15, then get her to match my contribution until she works full time. At that point I stop contributing and she takes over, hopefully contributing up to $400 per month. This needs to be a set-and-forget setup and will be a very long term investment.

The intention of this is to give her financial security later in life, assuming that buying a house is not possible. Compounding investment is at its best when starting very early.

The reasons for doing this and whether or not an ETF is the best approach doesn't really form part of the question I have as part of this thread, but I am open to suggestions if this approach is silly. (I may create another thread if needed).

Based on the background above, how should I structure this? Should I invest in my own name and transfer ownership to her one day? Should I invest in her name? The fund is a PIE, so I doubt there will be any tax advantages one way or another.

When I go through the Smart Shares sign up stuff, it does have the investor type of "Children" but there is no additional information on what exactly this means. I do notice that it does also ask for my information as a legal guardian. However, it appears that the investment will basically be in my name anyway. Is there any kind of legal status to basically make me the caretaker of the fund until she comes of age?

Any help is appreciated,

Thanks
Paul

[Snoopy]

Hi everyone,

My daughter turns 5 next month and I want to start an ETF portfolio for her via Smart Shares, likely the NZ Top 50 option. The intention is to contribute $100 per month until she turns 15, then get her to match my contribution until she works full time. At that point I stop contributing and she takes over, hopefully contributing up to $400 per month. This needs to be a set-and-forget setup and will be a very long term investment.

The intention of this is to give her financial security later in life, assuming that buying a house is not possible. Compounding investment is at its best when starting very early.

The reasons for doing this and whether or not an ETF is the best approach doesn't really form part of the question I have as part of this thread, but I am open to suggestions if this approach is silly. (I may create another thread if needed).

Based on the background above, how should I structure this? Should I invest in my own name and transfer ownership to her one day? Should I invest in her name? The fund is a PIE, so I doubt there will be any tax advantages one way or another.

When I go through the Smart Shares sign up stuff, it does have the investor type of "Children" but there is no additional information on what exactly this means. I do notice that it does also ask for my information as a legal guardian. However, it appears that the investment will basically be in my name anyway. Is there any kind of legal status to basically make me the caretaker of the fund until she comes of age?

Any help is appreciated,

Thanks
Paul

Hi Paul. Welcome to the forum. You have rolled quite a lot of questions into your first post. You are covering the conceptual setting up of long term fund, ideas of how to later on get your child engaged in the process, tax issues, just what is security when it appears a house is out of reach, the legal structures around what you are doing etc. etc. I suspect there is no one person here that could answer all of your questions. So I will comment just on the bits I know something about.

For a 'set and forget' fund, I would say you are on the right track with an 'index fund.' You clearly understand the effect of compounding interest yourself. Working against that in any managed fund is 'compounding fees'. So IMO it is very important to get the ongoing fee structure as low as possible. An NZX 50 index fund is probably a good starting point. But as the amount grows you may wish to look at some of those other index funds. I am quite a fan of some diversification into Australia, because it is the one foreign country the NZ IRD does not hit with punitive 'foreign investment fund' taxes.

The PIE tax rate does vary depending on the holders marginal tax rate. So I am guessing there may be some tax advantage in putting it in your daughter's name. But commenting on the legal implications is beyond my circle of competence, so I will stop there.

SNOOPY

PS I wouldn't give up on your five year old daughter ever being able to buy a house. Despite there being many people out there believing that house prices always go up, I think things have escalated to a level where a significant correction is inevitable. But predicting when that might happen? Houses can remain overpriced for a long time.

[smpl]

You have not mentioned Kiwisaver. With a ~$1000 contribution, she would receive a 50% ROI per annum from the government's contribution before any gains in long term investments ie a very good investment.

[Pipi]

You have not mentioned Kiwisaver. With a ~$1000 contribution, she would receive a 50% ROI per annum from the government's contribution before any gains in long term investments ie a very good investment.

What government contribution? They stopped the $1000 start up a while a go and you don't get the $542 a year till you are 18.

[mp52]

I'm in a similar frame of mind Pipi so am looking at options. An index tracker seems the way to go - and I've got to decide between direct contribution through Smartshares or via the relatively new fund (Simplicity) both of which now offer Vanguard US and global ETF exposure.

One thing to say about Kiwisaver - I took this up when the $1000 kickstart was still around. At the time, Westpac was the only institution offering a feee waiver for under 18s so I've left it with them. There may be others now. Without the fee waiver the management fees eat away the principal unless its being actively contributed to.

In addition to ETFs and Kiwisaver, P2P may play a part but not until funds have accrued to the point where a reasonable risk spread can be achieved across loans. Also have to consider the risk of higher defaults on loans in coming years if interest rates go up and borrowers come under pressure.

In terms of tax I don't think there's an issue placing the account under your daughter's name and qualifying her for the minimum PIR. From memory when you set-up the Westpac KiwiSaver scheme for a child they calculate the (14%?) rate by default.

In any case, as Einstein said, "Compound interest is the eighth wonder of the world" so the main thing is start'em young I reckon.

[Pipi]

In addition to ETFs and Kiwisaver, P2P may play a part but not until funds have accrued to the point where a reasonable risk spread can be achieved across loans. Also have to consider the risk of higher defaults on loans in coming years if interest rates go up and borrowers come under pressure.

P2P lending will only be an option if you put it under your name. I have looked into it and you have to be over 18, so i can't set up an account in my daughters name and get the low PIR. So that needs to be taken into consideration.

I also started my daughter young on kiwisaver, so she got the $1000 start up. I put $20 a month in for her and it has built up to over $4k.

I'm interested in setting up a smart shares type thing for her. She now has $600 saved, so $500 into smartshares then $50 contribution monthly, I would have to help with that as her pocket money won't cover it, but want to get her into the investing mind frame at a young age. I'm thinking I might wait till the next market correction, so she can get in low.

[MBSteve]

Hi everyone,

Apologies for taking so long to respond. Thank you all for your contribution. I think it has confirmed most of my thoughts on the process.

I think I will set it up in her name with me as the legal guardian.

Thank you all for your time

Paul

[kiwico]

Our girls (11 and 12) have their own KiwiSaver. They were opened when the $1000 starter was still available.

They both own Mercury shares in their own name as these were bought at the IPO. I have set share accounts with ASB Securities for them but as these are actually in my name (but to their account) I still get stung at my tax rate. It all gets a bit difficult.

[Jay]

Similar situation to me kiwi - KS and MCY shares for each of my children, also have other shares in my name for them, which I could do a transfer to theirs I suppose. Then don't have to worry about tax, only difficut part is when I want to sell, have to reverse the process, which takes time.

[kiwico]

Similar situation to me kiwi - KS and MCY shares for each of my children, also have other shares in my name for them, which I could do a transfer to theirs I suppose. Then don't have to worry about tax, only difficut part is when I want to sell, have to reverse the process, which takes time.


But isn't part of the reason of having them in their name to reduce your tax liability (this was my mistaken attempt at setting up ABS and NAB trading accounts in "their" name which have ended up in mine).

[Jay]

/*Qoute: But isn't part of the reason of having them in their name to reduce your tax liability*/

In my case no. I have set it up for their futures, for education later on etc etc, no as a way to reduce my tax liability per se.
Doesn't really reduce or increase my tax liability, as the dividends being received that are theirs in essence are fully imputed ... so far

Plus if I want to sell in hurry I can