Investing for your kids always sounds like a great idea. Giving them a headstart to make sure they don't encounter the same challenges you did. At least not financially.
This has recently become topical across social media, and I've also received a few questions on the subject.
Theoretically great. Practically, challenging. It is often not as easy or as straightforward as it seems. There are many considerations to be made before investing, which are often not talked about.
Below are some
Minors - if your kids are under 18 years of age, they are considered minors. Any income earned by minors should be reported to SARS by the parents or guardians. This income is treated(and taxed) as one with the guardian's. It is only from the age of 18 that the child can register as a tax payer and complete their own returns independently.
Guardianship - If you are investing for family members, make sure you have had a conversation with the parents responsible for the child. Your investments may have an impact on their relationship with SARS. Extra tax, exemptions, etc. Also understand that, even though you may be making the investment, the guardian has control over that money and may decide to use it in any way they see fit. You may not like what they do with the money.
Tax treatment - be aware of the tax treatment of the investment. Is the tax withheld at source(dividend withholding tax)or is it taxed in the hands of the investor(interest income, REITs)? The former is preferred while the latter will definitely impact the guardian's finances
Life happens - everyone knows of or has experienced a relationship that became difficult between children and parents. As kids grow, they become adolescents. They start developing their own minds and ideas about life, often contradicting those ideals held by parents. What do you do with the investment if the relationship with your kids becomes strained? There are horror stories out there of parents 'cutting off' their kids financially. What implications does this have for the investment?
Major Status - Understand that your child will have full contol of their investments at the age of 18. I'm not sure how many 18 year olds are financially mature with a bagful of money. Most of us wish we had money at that age, but mostly for frivolous things. Not for making sure we are able to financially secure our futures. Teach your children about money, but also prepare yourself to let go once the time comes
Investment Vehicle - each investment vehicle has its own unique features, advantages and disadvantages. Discretionary account? TFSA? Endowment? Retirement Annuity? Actual Property?
Your name or theirs? Understand the implications of each decision. What would happen when when you(the investment contributor) pass away in each of the situations? Who would be in charge? Will your wishes be done? How much power do you have to enforce your wishes? What happens when the requirements you set out are not met?
Seemingly there isn't a foolproof solution. You have to understand the advantages, disadvantages, risks and benefits of any decision you make.
Do you have any more suggestions that I have left out, that you think are worth considering?
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