How to Invest for Your Children & Grandchildren (without them becoming brats!)

so as you might have noticed the last few weeks have been pretty big for the shack household I've been waiting for this moment for a long long time but finally I've done it and I could not have done it without your help a hundred thousand subscribers and of course this little guy here becoming a father and getting a hundred thousand subscribers in the same week it really does not get better than that so I thought it might be appropriate to do a video about investing for children we all want what is best for our children so it seems natural that you might want to open a savings account or a junior Isa for them but I can tell you that I will not be investing any money for him sorry mate but in most cases it does not make sense for parents to be investing for their children but if you're a grandparent well that's when it does make a lot of sense so I'm just gonna go and put him down and then I'm gonna come back and we're going to get stuck into it Well that took a lot longer than expected but where hello and welcome back to the channel if you're new here hi my name is James I'm a financial planner and this is a place where you can learn to make smarter financial decisions so two big downsides of investing is that it can be really painful in the short term as we've experienced over the last couple of years and it can take decades to see results which is why Investing For Children can be so powerful because not only do they have decades to wait but they're not going to care about the day-to-day gyrations of the stock market children are the ultimate long-term investors just look at this example in the UK a junior stocks and shares ISO is the main tax efficient way to invest money for children you can put 9 000 pounds into these each year and anyone can contribute to it so let's assume that as a family group you're able to max out that chance Isa every year from birth until 18. with the money being invested into a globally Diversified stock market index fund if we assume that this achieves an average annual return of 8.5 net of fees by the time this child is 18 they would have almost 400 000 pounds in their Isa and if they kept that invested until 30 without contributing any more to it it will be worth over a million pounds because children have such long investing careers ahead of them the compounding effects of investing even small amounts early on can be enormous and because they don't need the money anytime soon the short-term volatility of the stock market should not be a concern so why then am I choosing not to do this for my son one reason control when people think about investing for children there are typically two concerns the first is control we want to ensure that the money that we're giving away is going to be invested correctly and spent wisely but we also want to make sure that that investment is tax efficient and cost effective for both us and the child these are two competing objectives and when we're investing money for our children we often have to trade off one for the other if you want maximum tax efficiency you're often going to have to give up some element of control but if you want maximum control then you're going to have to settle for something that's probably not that tax efficient and is going to cost you more if I put money into a junior ISO for my son that money will grow free of income and capital gains tax which is highly tax efficient however once inside the junior Isa that money will not be accessible until he's 18. so it can't be used to pay for things like school fees or any extra support that he needs before then and then once he does turn 18 he will automatically gain troll of that money and be able to spend it as he pleases now when I look at him as a cute little newborn I feel that he could do no wrong and I have absolute confidence in my parenting ability to make sure that he turns out to be financially responsible but that's probably a little bit naive because despite my best Endeavors I have no idea what is going to happen in the future or how he's going to turn out so that's the trade-off I can invest this money in his name for high tax efficiency but I have to give up control and I would rather not do that especially as I can just invest that money in my own Stockton shares Isa which is just as tax efficient it allows me to retain full control and unlike the junior Isa I can access it before he's 18 to support him or my family I could even set up a separate icer account in my name but just have it mentally assigned to him and between myself and my wife we can put a maximum of 40 000 pounds a year into Isis which is a huge amount of capacity and even if I was maxing these out I would probably prefer to to invest in our pensions over a junior Isa because it's more tax efficient I retain control and by the time that I can access my pension my son should be about 25 years old exactly the time that he might need additional help from me with things like getting on the property ladder as a parent especially a new parent it's natural to want to put money aside for your kids but the reality is that from a tax and control perspective it doesn't make sense and instead you should be focusing on building up your own Financial strength so although for most parents it does not make sense to invest for their children for grandparents and other family members it certainly can so let's look at this from the perspective of a grandparent when it comes to gifting grandparents are typically concerned about exactly the same things control and tax efficiency so let's look at the different types of accounts that they could use to invest a junior Isa is an option but it presents exactly the same problems that we looked at before once the money is inside it it can't be accessed until the child is 18 and after that point the child gets full control so another option is to just do exactly the same thing that we just looked at with parents don't give any money away and instead keep that money invested in your own ices and pensions and buy things as and when your children and grandchildren need them this way you retain total control and it's likely to be very tax efficient the only problem is inheritance tax in the UK we have an inheritance tax no rate ban of 325 000 pounds which means that when we die we can pass on 325 000 pounds to our beneficiaries without having any inheritance tax to pay there is also a residence nail rate ban that means that if you leave your primary residence to one of your direct descendants 175 000 pounds of this will be free of inheritance tax although this allowance is reduced if your estate is worth over 2 million pounds so for most people you can pass on 500 000 pounds free of iht or a million pounds if you're a couple but anything above this level will likely attract inheritance tax at 40 percent so let's look at an example Fred and Alice are in their early 70s and have 1.9 million pounds worth of assets their home is worth 900 Grand they have a buy to let worth 300 Grand they have 200 000 pounds of cash and other Investments and half a million pounds in pensions their pensions fall outside of their estate which means that they have a taxable estate of 1.4 million which means that if they were to both die today there would be a tax bill of a hundred and sixty thousand pounds Fred and Alice would like to avoid this so how can they go about it well ultimately inheritance tax is an optional tax nobody has to pay it so long as you're prepared to give your assets away well before you die firstly we each have an annual gifting allowance which means that we can gift 3 000 pounds a year and it immediately Falls outside of our estate and will not attract inheritance tax this could be three thousand pounds that you're giving to one person or it could be split amongst multiple people and you can carry forward any unused allowance by one year but after that the allowance is lost which is why it's important that Fred and Alice start making use of this early on because for any other gifts that they make Above This allowance they will have to survive for seven years after the gift is made to be sure that no iht is payable so clearly it's important that they start making gifts sooner rather than later but perhaps they might be reticent to do so because they are unsure of whether they might need this money themselves in the future if they were clients of mine I would do a bunch of modeling to help them determine how much they actually need in retirement so even if they end up in a care home we can identify how much they can afford to confidently give away without their being a big risk of it affecting their quality of lives in the future but even then they're still going to be concerned about control and tax efficiency so what are the tools that they can use to invest for future Generations Junior Isis are the most popular option for children under 18. we're already aware of the drawbacks but they are very simple low-cost and tax efficient however there are two things that put people off the first is that you can only have one of these per child so if you have multiple family members that are all contributing to the same Isa you lose track of the contributions that you have personally made I know that if I invested a significant sum of money on behalf of a God child or a niece I would like to be able to track how it's performing so that when they turn 18 I can say look this is from me specifically the second reason is that the money cannot be used to support the child before they turn 18. so if they needed extra support with tuition or perhaps money for braces unfortunately you can't use the money in an Isa however there is another tool that I often use with clients that solves both of these problems it's called a bear trust or a junior investment account as some investment platforms call it the benefits of these are that anyone can open one of these accounts on behalf of a child there is no limit to how many a child can have and there's also no limits to how much money you can put into them each year there are often no additional costs for setting these up and you can invest in exactly the same stuff as with a normal investing account and the big benefit is that the person who sets up the account controls it and they can choose to distribute the funds to the child before they turn 18 to pay for things like school fees however the drawbacks are that these accounts do not have the same tax advantages as a junior Isa so any capital gains or income receives may be taxable however because the money is held in the child's name income and gains are attributable to them so as long as they don't have any other income coming in it's likely that this will fall within their personal income and capital gains tax-free allowances so although they are not as tax efficient as a junior Isa you can still manage tens of thousands of pounds in these relatively taxable when the child turns 18 you need to make them aware that these funds exist and that they can access them if they wish however unlike a junior Isa it is possible for these funds to remain in the account managed by the trustees until the child calls on them and finally because not many people are aware of these accounts only a small number of retail investing platforms offer them like AJ Bell and best invest I have one client who has six of these accounts one for each of his grandchildren and he really likes them because one he controls these accounts and he can see them on his investment platform right next to his personal investment accounts two he can add to them whenever he wants but he can also choose to distribute money to the children whenever he chooses and three this is just his money it's not co-mingled with other people's contributions so when the children turn 18 he can say that this is the money that he put aside for them specifically whether you prefer a junior Isa or a bear trust depends on whether having control and visibility of the gifts that you're making and having access to those funds before the child turns 18 is something that's really important to you I know that I would personally prefer to use a bear trust when I'm making larger gifts and I actually already have their trust set up for my God children but if I am just giving my niece or a friend's kid 50 pounds for their birthday I would rather just stick it in their junior ISO or whatever the parents have already set up just because it's simpler as a parent I am going to set up both a bear trust and a junior Isa for my son as discussed I am not going to be investing in these myself but they are there in case friends or family members want to make contributions and will decide which account to use depending on whether they want the option of the money being used before he turns 18. a junior sip is another account that you could use but these are much less popular because as with an ordinary pension the child won't get access to the money until they're at retirement age and most people would rather see children benefit from the money well before that these are the three most common types of accounts that are used for gifting but each of them involves giving up control of the assets when the child turns a certain age so what can you do if you want more control than this there are two main options a family Investment Company or a discretionary trust these two options allow you to get funds outside of your estate whilst allowing you to retain control indefinitely and choose when to distribute those funds and to who when making gifts to adult children people are often looking to retain control not because they don't trust their children but because they're concerned that they might get divorced even if their relationship seems solid right now we need to face up to the reality that 50 of marriages end in divorce and it can be extremely painful to make a generous gift to your child to see them lose half of it as part of a divorce these two options can help protect against that but that extra control and flexibility comes at the expense of tax inefficiency and higher costs to the extent that they are only really worthwhile if you have hundreds of thousands of pounds to put in them and have already exhausted all other avenues but in the right circumstances they can be very useful and if you're into interested in finding out more about these strategies I've put some links to some useful resources down in the description if you care about your loved ones which you obviously do there are two things you need to have in place before you even think about gifting any assets away in this video here I show you an example of one of my clients Barbers who did not have these things in place and consequently ended up with a four hundred thousand pounds inheritance tax bill so if you want to make sure that that doesn't happen to you you know what to do

Channel: James Shack

Views: 54,438

Keywords: Investing, Children, JISA, Junior ISA, SIPP, Junior SIPP, Discretionary Trust

Id: FYzfGeeOJfs

Length: 13min 54sec (834 seconds)

Published: Mon Sep 11 2023