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  1. #1
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    Default Investing in children’s names

    We have two daughters aged 1 and 2. Don’t plan on having any more.

    We are about to receive a lump sum from selling a rental property (tired of being landlords and want diversification) in 3 weeks time.

    We have our own home worth 800k ish and 300k loans on it. Lump sum from sale will be 350k ish.

    We are wanting to put all of it into index funds but am wondering about putting some in the kids names for tax and estate planning purposes.

    Ideally we’d use the money to retire early and pursue other interests (setting up an endurance sport coaching business). Currently I’m in corporate career earning decent salary but long hours and stress.

    I really don’t want the kids to have a poor work ethic because mum and dad (me and my wife) have set aside University costs, house deposit, wedding paid for etc) as feel that doesn’t create any sort of work ethic and hustle for their own good.

    I’m thinking just put all in my wife’s name (lower tax bracket as stay at home mother) and be done with it but don’t want to overlook anything.

  2. #2
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    Quote Originally Posted by epower View Post
    We have two daughters aged 1 and 2. Don’t plan on having any more.

    We are about to receive a lump sum from selling a rental property (tired of being landlords and want diversification) in 3 weeks time.

    We have our own home worth 800k ish and 300k loans on it. Lump sum from sale will be 350k ish.

    We are wanting to put all of it into index funds but am wondering about putting some in the kids names for tax and estate planning purposes.

    Ideally we’d use the money to retire early and pursue other interests (setting up an endurance sport coaching business). Currently I’m in corporate career earning decent salary but long hours and stress.

    I really don’t want the kids to have a poor work ethic because mum and dad (me and my wife) have set aside University costs, house deposit, wedding paid for etc) as feel that doesn’t create any sort of work ethic and hustle for their own good.

    I’m thinking just put all in my wife’s name (lower tax bracket as stay at home mother) and be done with it but don’t want to overlook anything.
    First step - repay your mortgage. If you wish to invest in a share fund or similar, raise a new loan. If you take the right steps your interest will be tax deductable.

  3. #3
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    Default

    Could consider Kiwisaver in the name of each child. Ours are young adults now and still contributing through employers. They check their statements to see how they are doing (pretty well actually).

    Also set up investment funds for them, quietly growing. Out of sight out of mind for them and I never mention them. But will when the time is right. These were in my name and notated with their names, transferred over to their names at 18. Still one under 18.

    Just to add, my intention was financial literacy first of all. Birthday cards had a small note saying your Kiwisaver is now $xxx and through that you own a little bit of yyy company. When little a small present and a top up.

    All done through Fisher Funds.

  4. #4
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    Quote Originally Posted by epower View Post
    We have two daughters aged 1 and 2. Don’t plan on having any more.

    We are about to receive a lump sum from selling a rental property (tired of being landlords and want diversification) in 3 weeks time.

    We have our own home worth 800k ish and 300k loans on it. Lump sum from sale will be 350k ish.

    We are wanting to put all of it into index funds but am wondering about putting some in the kids names for tax and estate planning purposes.

    Ideally we’d use the money to retire early and pursue other interests (setting up an endurance sport coaching business). Currently I’m in corporate career earning decent salary but long hours and stress.

    I really don’t want the kids to have a poor work ethic because mum and dad (me and my wife) have set aside University costs, house deposit, wedding paid for etc) as feel that doesn’t create any sort of work ethic and hustle for their own good.

    I’m thinking just put all in my wife’s name (lower tax bracket as stay at home mother) and be done with it but don’t want to overlook anything.
    The biggest deterrent of putting assets in your children's name is the possibility of losing the assets later in life. When your children grow up and get married, and if there is no prenuptial agreement, they risk losing half of the assets. If held jointly, it can pose all sort of headaches too in a divorce if 1 party (of your 2 children) may not wish to liquidate the assets. Remember, quite often parents have no control in choosing who their next of kin can marry. This is why in NZ, Family Trusts are so popular, though there is the cost of administrating (you could view it that cost is the insurance premium in protecting the assets).

    You mentioned about putting the proceeds in an index ETF? If invested in an overseas ETF like the S&P500, then there's FIF. The problem with FIF is it taxes paper gains which is the biggest threat to the long term compound return of the investments. In my opinion, and the way our current gov't is addressing the housing problem, it is not very likely the returns on a sharemarket ETF NET of taxation, would beat the returns of owning a house in NZ. This is kinda like the unsaid rule when you sit in a financial advisor's office. They will not tell you or work you through the ins and outs of IRD's taxation applied to various managed funds in NZ and the workings of FIF. While on the other hand, owning a house, you basically get the tax free capital gain. Now of course it can be debated that future house price gains will be small but over a multi-decade return, again if you look at historical gains on house prices in NZ, it is not likely that trend will change much but the rules in place encourage investment in houses. NZ is a nation of having people invest in houses as 2/3rd of it's total wealth is comprised in real estate (in the much similar manner as in China). While places like Canada or the US, it's the other way around having 2/3rds of the wealth comprised in the stock market. Politically, it's not likely our gov't will use taxation against real estate to tip the advantages over to investing in overseas shares.

    But going back to why I find FIF is such a horrible disincentive to investors in foreign shares. I would like to show you a piece from John Bogle (RIP - the father of the index ETF):

    https://www.marketwatch.com/story/jo...urn-2016-05-19

    Here he explains how an 'all in cost' of 2% loses you 66% of the portfolio gain over a 50 year period (assuming a 7% annual return).

    "How much worse? How about two-thirds of your gains. It sounds crazy until you recognize what happens when supposedly small fees are allowed to run on for decades — Bogle's tyranny of compounding costs. "Let's assume the stock market gives a 7% return over 50 years. If you get to 7%, each $1 goes up to $30. If you get to 5% (that would be 7% less the industry's typical 2% all-in costs), you get $10," Bogle recently said in an interview.

    "So $10 versus $30. You put up 100% of the capital, you took 100% of the risk, and you got 33% of the return! As I say to people, if that strikes you as a good deal, by all means do it!"


    and I would like to emphasis the term "all in cost" because what he is speaking of is the losing of long term compound gains. FIF specifically does that where using the FDR method, up to 5% of the paper gain of the foreign investment becomes taxable at the individual's RWT rate. You don't see this happen, the managed funds or holder of your account does this along with their administration mgt fees they take off every year. Therefore if you go under this model, it's very clear the investor is not the winner in these investment schemes but rather, IRD and the fund managers because you've taken all the risk but get a lot less in return.

    Now i'm very certain many will disagree with my point of view. Over in N. America, taxation of such retirement plans are done at time of withdrawal - which is typically done at retirement (for which incomes at that elderly age is low). That means you can defer the tax to a period when you're at the lowest income tax bracket. However, with Kiwi Saver there is absolutely NO distinction of age related income. More than often, those that can contribute more towards the KS scheme, are usually in the higher RWT bracket, and therefore their KS fund under FIF, the paper gains will be taxed at their high income tax bracket. Anotherwords, those that can contribute more are penalised more by paying more tax into the investment scheme.

    Establishing a good worth ethic with your children starts with not worrying about spoiling them because they know you have a lot of money and wealth. It starts with educating them about the assets and how to compound the returns. NZ does very poorly in the area of Finance and not much is taught at grade school. This is different to in Canada where many families start investing from the time their child is born (ie RESP - reg. education savings plan), RDSP, RESP, TFSA, etc that exist there but in NZ, we only have KS. I would say don't worry about your children being spoiled - rather, educate them about your estate, how you feel that wealth took a very long time to achieve, don't risk it all in a bad divorce or tell them how important a prenup is.

  5. #5
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    and for those interested, here's the video of John Bogle referring to this 33% return issue:

    https://youtu.be/-ciaheW3aG0?t=136

  6. #6
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    Dec 2016
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    Quote Originally Posted by SBQ View Post
    The biggest deterrent of putting assets in your children's name is the possibility of losing the assets later in life. When your children grow up and get married, and if there is no prenuptial agreement, they risk losing half of the assets. If held jointly, it can pose all sort of headaches too in a divorce if 1 party (of your 2 children) may not wish to liquidate the assets. Remember, quite often parents have no control in choosing who their next of kin can marry. This is why in NZ, Family Trusts are so popular, though there is the cost of administrating (you could view it that cost is the insurance premium in protecting the assets).

    You mentioned about putting the proceeds in an index ETF? If invested in an overseas ETF like the S&P500, then there's FIF. The problem with FIF is it taxes paper gains which is the biggest threat to the long term compound return of the investments. In my opinion, and the way our current gov't is addressing the housing problem, it is not very likely the returns on a sharemarket ETF NET of taxation, would beat the returns of owning a house in NZ. This is kinda like the unsaid rule when you sit in a financial advisor's office. They will not tell you or work you through the ins and outs of IRD's taxation applied to various managed funds in NZ and the workings of FIF. While on the other hand, owning a house, you basically get the tax free capital gain. Now of course it can be debated that future house price gains will be small but over a multi-decade return, again if you look at historical gains on house prices in NZ, it is not likely that trend will change much but the rules in place encourage investment in houses. NZ is a nation of having people invest in houses as 2/3rd of it's total wealth is comprised in real estate (in the much similar manner as in China). While places like Canada or the US, it's the other way around having 2/3rds of the wealth comprised in the stock market. Politically, it's not likely our gov't will use taxation against real estate to tip the advantages over to investing in overseas shares.

    But going back to why I find FIF is such a horrible disincentive to investors in foreign shares. I would like to show you a piece from John Bogle (RIP - the father of the index ETF):

    https://www.marketwatch.com/story/jo...urn-2016-05-19

    Here he explains how an 'all in cost' of 2% loses you 66% of the portfolio gain over a 50 year period (assuming a 7% annual return).

    "How much worse? How about two-thirds of your gains. It sounds crazy until you recognize what happens when supposedly small fees are allowed to run on for decades — Bogle's tyranny of compounding costs. "Let's assume the stock market gives a 7% return over 50 years. If you get to 7%, each $1 goes up to $30. If you get to 5% (that would be 7% less the industry's typical 2% all-in costs), you get $10," Bogle recently said in an interview.

    "So $10 versus $30. You put up 100% of the capital, you took 100% of the risk, and you got 33% of the return! As I say to people, if that strikes you as a good deal, by all means do it!"


    and I would like to emphasis the term "all in cost" because what he is speaking of is the losing of long term compound gains. FIF specifically does that where using the FDR method, up to 5% of the paper gain of the foreign investment becomes taxable at the individual's RWT rate. You don't see this happen, the managed funds or holder of your account does this along with their administration mgt fees they take off every year. Therefore if you go under this model, it's very clear the investor is not the winner in these investment schemes but rather, IRD and the fund managers because you've taken all the risk but get a lot less in return.

    Now i'm very certain many will disagree with my point of view. Over in N. America, taxation of such retirement plans are done at time of withdrawal - which is typically done at retirement (for which incomes at that elderly age is low). That means you can defer the tax to a period when you're at the lowest income tax bracket. However, with Kiwi Saver there is absolutely NO distinction of age related income. More than often, those that can contribute more towards the KS scheme, are usually in the higher RWT bracket, and therefore their KS fund under FIF, the paper gains will be taxed at their high income tax bracket. Anotherwords, those that can contribute more are penalised more by paying more tax into the investment scheme.

    Establishing a good worth ethic with your children starts with not worrying about spoiling them because they know you have a lot of money and wealth. It starts with educating them about the assets and how to compound the returns. NZ does very poorly in the area of Finance and not much is taught at grade school. This is different to in Canada where many families start investing from the time their child is born (ie RESP - reg. education savings plan), RDSP, RESP, TFSA, etc that exist there but in NZ, we only have KS. I would say don't worry about your children being spoiled - rather, educate them about your estate, how you feel that wealth took a very long time to achieve, don't risk it all in a bad divorce or tell them how important a prenup is.
    Ok was tossing up total world fund TWF or NZX50 fund FNZ.

    NZX works out better on tax but less diversified (50 companies in one country vs 8000+ in multiple economies)

  7. #7
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    Dec 2016
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    Quote Originally Posted by artemis View Post
    Could consider Kiwisaver in the name of each child. Ours are young adults now and still contributing through employers. They check their statements to see how they are doing (pretty well actually).

    Also set up investment funds for them, quietly growing. Out of sight out of mind for them and I never mention them. But will when the time is right. These were in my name and notated with their names, transferred over to their names at 18. Still one under 18.

    Just to add, my intention was financial literacy first of all. Birthday cards had a small note saying your Kiwisaver is now $xxx and through that you own a little bit of yyy company. When little a small present and a top up.

    All done through Fisher Funds.
    What’s the purpose of doing KiwiSaver if they can’t access until 65? Why not just keep in your own name and give them the cash in your estate (likely when they are 65 and you’ve kicked the bucket anyway).

    Also why out of sight, out of mind, what’s the purpose for these? i.e. what’s the end goal?

  8. #8
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    Quote Originally Posted by epower View Post
    What’s the purpose of doing KiwiSaver if they can’t access until 65? Why not just keep in your own name and give them the cash in your estate (likely when they are 65 and you’ve kicked the bucket anyway).

    Also why out of sight, out of mind, what’s the purpose for these? i.e. what’s the end goal?
    Well the gov't will give you $521.43 each year into KS contribution. But if you're proceed sums like the price of a house, that KS gov't grab may be insignificant.

    You can unlock out of the KS if the proceeds go into a 1st home. But still, this does NOT address the initial question I asked before. 'Asset protection' - can you be sure a divorce does not happen? or maybe you don't care to see what happens to the investment in a divorce (as some see it, when you're dead, you're dead so you're none wiser).

    Ok was tossing up total world fund TWF or NZX50 fund FNZ.

    NZX works out better on tax but less diversified (50 companies in one country vs 8000+ in multiple economies)
    Total World Fund would still attract FIF. Going with the NZ50 ETF is one way out of FIF but NZ companies have a habit of issuing dividends (which are a taxable event), instead of keeping the earnings on the balance sheet -> higher share price for tax free capital gain. Then there's friction in corporate taxes like NZ's corporate tax rate of 28% vs 0% on something like shares in Amazon or Apple. Naturally the company that pays less tax will have higher returns. IMO, holding a large sum of your wealth under NZ is too risk and should be more diversified having a global exposure (every financial advisor agrees with diversification).

  9. #9
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    Quote Originally Posted by epower View Post
    What’s the purpose of doing KiwiSaver if they can’t access until 65? Why not just keep in your own name and give them the cash in your estate (likely when they are 65 and you’ve kicked the bucket anyway).

    Also why out of sight, out of mind, what’s the purpose for these? i.e. what’s the end goal?
    Kiwisaver - first home buyer deposit and incentives.

    Out of sight etc - interim goal is to not spend up to lie on the beach in Bali at 19. End goal is for them to make a slightly more mature decision.

    And then there is compound interest, often called the 8th wonder of the world.

    And financial literacy.

  10. #10
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    Quote Originally Posted by SBQ View Post
    Well the gov't will give you $521.43 each year into KS contribution..
    Won't get that until they reach 18.

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