Ask Paul: I'm investing for my kid - when should I transfer it to their name?

Dear Paul,

My question relates to investing in your child's name. As you have stated in the past, with the parent as trustee you can then transfer to the child free of CGT. Who bears the income on the way through?

Also at what age is it appropriate to transfer the investment to the child? - Matthew.

Interesting question, Matthew. As well as doing this for our kids from a very early age, we are now doing the same for our grandkids.

The income issue is simple. Whoever is the trustee pays the tax each year. That means it makes sense to hold investments as trustee in the name of the lowest taxpayer.

The next part of your question, as to when to release the funds, is quite challenging. I think the answer is needs-based. If money was required for secondary or university education, that would always come first. Education and knowledge lead to better financial outcomes, so I'd release funds for educational purposes.

Once we get past that, then things like a car may be important, although I'd prefer to resist that. A car is a depreciating asset and a money burner, though very convenient. Once we can travel again, I'd release funds for an extended overseas trip. That, I believe, is knowledge-enhancing and this benefit is with you forever.

In the perfect world, it would be used for a home deposit. This is what two of our kids did. Our other child managed to hang onto his childhood investment and in his 30s he still holds it. We started buying him CBA shares for a few dollars decades ago, with the dividend reinvestment option. The amount this has built up to is testimony to the power of compound returns. In each case we transferred ownership to them at around 25 years of age.

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