Six ways to invest for kids with Glen James

Bryce: [00:00:21] Welcome to another episode of Equity Mates. Or should I say. You cannot be serious. You've landed on another episode of Equity Mates. Well, you better brace yourselves, because we're about to serve you some aces in the world of investing. Whether you're still hitting balls against the garage door or you're following in, volleying in the investment Grand Slams, we're here to make sure your financial game is nothing short of legendary. As always, I'm here with my equity buddy, Ren. And Ren, who am I?

Alec: [00:00:48] You're John McEnroe.

Bryce: [00:00:50] I swear, you have my stuff. Sascha, we need to change. 

Alec: [00:00:54] I'm actually surprised you thought of that one. 

Bryce: [00:00:57] I didn't. I didn't think of any of these. 

Alec: [00:00:59] Oh, you ask ChatGPT. 

Bryce: [00:01:00] This is producer Sascha slash audience. 

Alec: [00:01:03] Sascha, I didn't know you're such a tennis fan. 

Sascha: [00:01:04] Oh, how can you not know John McEnroe. 

Alec: [00:01:08] Did Bryce know John McEnroe. 

Bryce: [00:01:09] Yeah, Everyone knows John. 

Sascha: [00:01:11] I'm disappointed that I thought you would commit more to the. 

Bryce: [00:01:16] You have to put more emphasis on. 

Alec: [00:01:19] Well, try and stop me because you haven't yet. 

Bryce: [00:01:21] All right. Well. I'm going to change the title of the doc and location, and then we'll see what happens. 

Alec: [00:01:26] Going to say hand on heart. I promise you, I've never looked. 

Sascha: [00:01:29] I can see Ren's screen. And he's not looking at it. 

Bryce: [00:01:32] Not now. That's how you go. 

Alec: [00:01:35] Anyway, let's get into the episode, because this is a long one. It's a cracker. We're joined by a fellow podcaster, Glen James from My Millennial Money. We're talking all things investing for kids because there is nothing the world needed more than three childless men talking about children. 

Bryce: [00:01:55] But then it is a question that we get asked almost every single week How can I invest for my kids? What are the best structures to invest in for my kids? One of the best platforms to invest in for my kids love to say it and hear it too, that everyone, those with kids, are thinking about starting that journey as early as possible. And the reason we have Glen on is because while he was in Bali by the pool, he spent his holidays researching the ways in which you can invest for kids. 

Alec: [00:02:23] Fun, holiday fun. 

Bryce: [00:02:25] So he's done some episodes on his show around this, but we thought we'd bring him on and have a discussion and go through the ways in which you can invest for kids.

Alec: [00:02:32] If the next hour and a half isn't enough for you, then in the show notes for this episode, we have links to Glen's podcast, the episodes where he speaks about this. He also did a Q and A after the first episode. He also wrote a blog post. I will include that link. And while you're in the show notes, we also have a link to sign up to our emails. Worth signing up some of the best content you'll ever get in your inbox twice a week, so jump on there while you're clicking on links in the show notes. Now we've got to be clear, whilst we are licensed, while Glen is licensed, none of us were aware of your personal financial circumstances. Any advice you hear is general advice. Importantly to especially mention when it comes to investing for kids. There's also tax implications. It's important to stress here when it comes to tax. We're not professional tax advisors speak to an accountant or a tax professional because, you know, tax is complicated. Everyone's circumstances are different. So this is very general, this chat. 

Bryce: [00:03:29] Yes. Now, the episode triggered a lot of conversation in the Equity Mates office. 

Alec: [00:03:34] Including for one team member who has been investing for kids. Yes. And Glen in this episode suggested that maybe there was he needed to do extra things. 

Bryce: [00:03:45] Yeah. So the first two ways that we discuss investing for kids is in your own name and then in what is known as an informal trust. 

Alec: [00:03:53] So we just before we get into it, we just wanted to make one thing clear. There are different ways to do both and there are different sort of steps you have to go through. And that's a decision for you to make. You know, speak to a tax professional. We'll go through, I guess, sort of some of the pros and cons at a high level of each. But if you have a kids account with any of those providers and you're worried that you haven't got your kid their own tax file number, um, that's that's only a problem if you want to report it as an informal trust, if you want to just keep it as an account that has a kid's name on it. But it's, it's your assets part of your tax return, you can, you're doing it okay in your own name. So I think that's probably just worth saying because Glen comes out strong and says 90 to 95% of people are doing it wrong and it's they're doing it wrong. If they wanted to set up an informal trust. 

Bryce: [00:04:44] Yes. All right. Well, if that was a bit jargony and a bit confusing, then it will make sense in about half an hour when we go through it all. But let's get stuck in his Glen James from my millennial money with Investing for Kids. All right. Well, we're here with Glen James, the founder and host of the popular finance podcast Millennial Money. Glen, welcome. 

Glen: [00:05:05] Hey, how are you? 

Bryce: [00:05:06] Good. I think w e've gone full circle because today at the time of recording anyway, 3rd of October, our episode with you went out on your podcast. 

Glen: [00:05:15] I know, and it was the longest podcast episode we've ever put up, I think. 

Alec: [00:05:19] Really. 

Glen: [00:05:19] Because it was like 2 hours and 17 minutes or something like that. 

Alec: [00:05:23] It was a long hours, long session. 

Bryce: [00:05:25] I really enjoyed it.

Alec: [00:05:26] It was like a therapy session. Yeah. Yeah. And we got quite personal. 

Glen: [00:05:29] Yeah, that's good.

Bryce: [00:05:30] Covered a lot of ground. 

Glen: [00:05:31] Yeah, absolutely. 

Bryce: [00:05:32] Today, we're covering a very specific type of ground. 

Alec: [00:05:37] Well, yeah, we're not getting personal because we're talking about a topic which none of us have first hand experience with. As three, Glen, I actually. I'm assuming that you don't have kids. 

Glen: [00:05:45] Not that I know of. 

Alec: [00:05:46] Okay. Yeah. So as three podcasters that don't have kids, we're going to do a deep dive on investing for kids. And the reason we got you, Glen, is because you've gone deep on this topic. You've released a couple of podcast episodes on your podcast that will include in the show notes where you've gone deep on the different ways, the pros and cons, all of that. It's a really common question that we get here, which I think is a reflection of where our audience is in that stage of life. And so we wanted to bring the to answer all these questions. 

Glen: [00:06:18] And it's good timing because this episode for kids, I believe you've got an announcement, Ren. 

Alec: [00:06:25] I do not. Bryce is married for a year. Is one year. Wedding anniversary was on Sunday. Yeah. So very exciting. 

Bryce: [00:06:35] That has no relation to kids. 

Glen: [00:06:37] So let me ask both of you before you get started, what has your experience been with investing for kids like? Have you had anyone close in your life do it for their kids? Have you got nieces or nephews yourselves? Where are we in terms of the lay of the land? 

Bryce: [00:06:53] So probably the most relevant and I guess personal right now is Simon in our office. He had a young girl at Christmas last year, I think, and set up the Vanguard option. I'm not sure the structure or anything, and I'm sure we'll get into it. But he puts in, I think it's 20 bucks a week or something along those lines into whatever their product is.

Glen: [00:07:15] Yeah. 

Bryce: [00:07:15] Outside of that, we get asked the questions a lot and a lot of people sort of just turn to if that app has a kids offer and then try and figure out if they can set something up under their own name. That's as much as I know or have experience with. 

Alec: [00:07:29] Your life has a few instances of investing for kids like you invested as a kid. That's one way you can get your kids to start investing. Your wife, I think her family invested on behalf of their kids. Yeah. Yeah. So I got another way of doing it. I don't have any experience. I'm new to this. 

Glen: [00:07:49] Well, and this is it. So basically, I've worked out there maybe six ways that you can invest for your kids. And it doesn't necessarily need to be your kids because a lot of people have nieces and nephews like myself. You might have godchildren or you might have grandchildren. I might have, I don't know, insert cool children name here. Okay. So the six ways that I believe that you can invest for kids, number one in your own name. Pretty simple. An investment account, a brokerage account platform, bank account, whatever, in your own name. Number two, an informal trust. Now, this one will spend some time on because this is the main one that most people are doing. And spoiler alert, I believe probably 90, 95% of people are doing it incorrectly. Number three, an investment or education bond that can be controversial. We can cover that. Number four, this is getting creative in superannuation. So setting up a super account for a child, which I've personally and I can share a bit of my story around investing for kids after this. And my own view has changed on how I invest for my nieces and nephews and how I'll invest for my spawn if that ever arrives that day after doing this deep dive. Number five, a formal trust. So we've all heard of discretionary family trusts or a potentially special disability trust, and we like go there for this episode, but that does include also a testamentary trust. Okay. Are you familiar with those terms? 

Bryce: [00:09:26] Not testamentary.

Glen: [00:09:27] So that's fine. And then number six, and this is one that piqued Ren's interest, I believe, and that is investing in experiences. And we'll just pause there because when I was an early teen, like my parents took us on holidays, like I came from a working class family on the Central Coast. And when I was 13, mum and dad saved up and you know, where do you go if you're Aussie and you got a bit of cash, get on that bogan missile and land in Denpasar like we went to Bali. And that was an experience and I still have memories from that when I was 13 years old. So a couple of things before we get started. This stuff that we're talking about is primarily for those who tax residents of Australia. So if you're overseas and all that, well, that's cute, Enjoy the ride. But you know, this is based in Australia. A couple of other things. We won't go too deep around estate planning. I think you said you put a link in the show notes the second episode. So I did to to in a bit, hour to one and a bit our episodes on this topic alone. So I covered a fair bit of estate planning stuff there. So having said all that, I at the moment I invest an amount into an investment bond for my niece and my two nephews. There's three investment bonds and I put superficial amounts of money into that each month. And I kick started it with some capital. And the view was to, you know, just slowly put that money in there. And when birthdays and Christmas came around like that, the kids don't need any toys or rubbish that they're just going to throw out. And you know, I'm sick of plastic everywhere. So I was just like, I'm not buying you stuff. So, yeah, I know I've told them. In fact, just recently I was on a holiday in Bali. Yeah, pretty much. And I actually was the first time that I actually sat down with my niece Grace, and had my laptop open over breakfast and was chilling. And I showed her the investment account and I said, Hey, you know how I don't really buy Christmas and birthday presents? Well, this is why this money is yours. You can see the name there, Grace. And she was like, Oh, wow. And basically I seen. 

Alec: [00:11:52] How old is Grace?

Glen: [00:11:54] 12. 

Alec: [00:11:55] So there are a few years where really the concept really didn't make sense for them.

Glen: [00:11:59] And I just thought, well, this was the first time that I actually told her that there's money for her. And the rationale being and we'll cover it in the investment bunting, the investment bond is in my name. However, there is a beneficiary on there, Grace and there is a note on the file that says, if Glennie J dies, she can have this money with the intention that she puts it toward a house deposit or something like that. Yes, I was literally in true, you know, entrepreneur style. I was in the pool area poolside in Bali, laptop researching.

Bryce: [00:12:35] Digital Nomad. 

Glen: [00:12:37] Literally this 12 page document of how to invest in kids I was working on while I was in Bali and it was interesting the contrast of me looking at that, but also being on holidays with the kids and having so much fun. After I did all this stuff, I actually sent in a request to the investment provider, which I need to call because it hasn't gone through. They've kept taking money out of my account and I said, Turn off the auto invest like the automatic monthly debits I've resolved now, I'm not putting any more money into those investment accounts and I'll just invest in experiences with my nieces and nephews. 

Bryce: [00:13:16] Nice. 

Glen: [00:13:16] So that's how I've kind of come around full circle. No. 

Alec: [00:13:19] Yeah. So. So expect to hate more Bali holiday? 

Glen: [00:13:22] Yeah, pretty much. So what I want everyone to kind of think of before we get started into these points is the concepts of investing for minors. And a minor in the act is someone under 18 and they're referred to as those with a legal disability because they're not old enough. Yeah, that's what I have when I read that. Yeah. Like my eyes, like legal disability. They're not old enough to make their own choices. So when investing for a minor, the concepts are broadly the same as when we invest in our own name, particularly when it comes to the beneficial owner. We can get into that. But I will carve out in this discussion there's a heap of information on our website about minors and bank accounts and like Ren. You might have a bank account, you might put a few grand in there that earns interest each year. Now, if you do not provide your tax file number to that bank account, they will withhold the full rate and then you do your tax return at the end of the year, get their money back. The only carve out in this episode for investing for miners is we are strictly talking investment accounts and platforms, not just bank accounts. Because if you research ATO minor bank account or child bank account, there are some carve outs and stuff that any child over 11 can open a bank account and check with your bank. And there are some rules depending on the kid's age and an interest threshold. And I think it is around the 417 a year because that's the tax free threshold for a minor that they will not withhold any money. But if it does earn more interest than the threshold, they'll withhold money. So then you need a text file number for the child. So that's kind of there's a carve out in what we're talking about today. We're not talking about literally just opening a bank account in a child's name. Yeah. [00:15:21][119.4]

Bryce: [00:15:22] All right. Well, with all of that said, let's move to the first way. And probably the most common, I'm guessing, which is to invest in our own name. [00:15:31][9.1]

Glen: [00:15:32] Yeah. So this is. This is really easy. And back to the discussion about I'm not investing for my nieces and nephews anymore. I am using the tool that they've got as an educational experience. So I'm not adding any more money, but it is more just I can show them how shares and investments work. So investing in your own name, it is kind of pretty simple. Like you might say, Hey, I'm building wealth and as my children age, when the need comes up for things, I'll just fund that or you know that saying like healthy parents, healthy kids or strong parents, strong kids. You don't read enough. Maybe because I'm a little bit older than you, I'm giving you. Stuff on my like algorithm. So a couple of things. There's no tax file nominated for the minor. That's easy. And this is really good easy. I'm just going to build wealth, invest in my own name. Now, what you could do is set up a second little investment app or platform still in your name, but just have it as a notional. That's for the child. Yeah, or that's for the children. 

Alec: [00:16:51] There are some brokers where you can have like sub accounts within the same broker as well. 

Glen: [00:16:55] Yes. And we can get to that because that's can be in your own name and it can also be setting up for the minor as an informal trust. 

Alec: [00:17:04] Well, let me let me give an example of in your name. So I would one of the brokers I set up a sub account for explicitly for Speki. Because I wanted to put the kid's name I wanted to create of broker. 

Glen: [00:17:18] You mean like a Sportsbet 360 or something like that? 

Alec: [00:17:22] No, it was, it was an actual broker and I wanted to just quarantine the returns and the losses I was making from Speki's for like a longer term investing portfolio. I could very easily just rename that account to my kid's name or to call my green and my kid's Speki. And then that I know is the investment, but I'm still it's still my assets and I'm still. 

Glen: [00:17:45] And the income flows onto your tax return through your tax file number and if you were going down that road and your little child called Speki, he turned 18 years old and you were like, Hey, Speki, I've saved up all this money from all the spec is here is $10,000. That's a disposal on your tax return. So the capital gains tax flows down to you and your tax return. So if it's in your own name, even if it is a notional account, that money is yours and it as you exactly said, you might go. I want to separate account just for you know, might have one for long term savings because if you own a boat, you know what I'm talking about. It's like having a child very expensive, but it's just a notional tag. Yeah, okay. And that's really easy because it's flexible. You don't have to set up a taxable number for the mine. You might what you might do is like build wealth in your own name, but set up a small micro investing app. And I like to say put superficial amounts of money in there, even if it's $10 a month just for the purpose of education for the child. But I say the word, We're not putting wholesale amounts in the child's name, quote unquote, and not wholesale is in ATO. Ask institutional investor, but wholesale in your world. Like, you know, if you're putting $500 a month into an investment account that's wholesale in your world like so you might have a small account on the side in your name, but. Just for the child to, Hey, this is your money and all this stuff. So. So the advantages are it's flexible and it's low hassle and you can use the money for anything as it comes up.

Alec: [00:19:23] And I guess then when the child's old enough, you can be like, Here's this money that's in your name and then give them some, like, decision making control over it. Yeah. How would you invest it? 

Glen: [00:19:33] That's right. 

Alec: [00:19:34] And that all flows into your tax return. 

Glen: [00:19:36] Yeah. And the I guess the consideration around estate planning, if you have a notional account, even if it is in your name and it's flagged Speki. You've got to make sure the state planning is considered. Because remember, if you were to die, that money flows straight into your state. So there's that consideration as well. 

Bryce: [00:19:58] This is how I did it as it was in Dad's name. Yeah. And then when I hit 18 share transfers and Yeah. 

Alec: [00:20:06] Hey, what if whatever money you made there, he would have paid the capital gains tax. 

Glen: [00:20:11] Yeah, well, he may have had an informal trust. Which there would have been. And we can get into that. 

Alec: [00:20:18] Well, let's put it in an informal trust and close out in your own name. To my mind right now, it feels like it's a pretty simple way, but you do just have to consider it's still your assets and it's your tax. Anything else we need to know about investing in your own name. 

Glen: [00:20:33] Yes. So if there is two people in the relationship, two parents, you may set up that account in the lower income earners. The only other thing is. I think this more investing in your own name is more about wages, just building wealth and the kids will be looked after because if they've got money they won't go without. Yeah. Mhm. That's the crux of building wealth. All good. Like you hear stories of people wanting to like oh our goal is to buy an investment property per child and you know, do all that stuff that's just build wealth. Your wealth. That's all we need to do. You may just have an offset account in your name and just build cash against your mortgage because at the moment 6% interest rate, that's a guaranteed return. So that's also in that category. But the blog will give you a bit more detail anyway. 

Alec: [00:21:30] Nice one. Well then let's move to the second category, the informal trust. And you teased this earlier by saying you think 90 to 95% of people are doing it wrong. So let's let's start with what it is and then get into how to do it, right?

Glen: [00:21:45] Yeah. So an informal trust like, you know, the the apps that we all have and you can click, I want to have a minor account. And it basically just duplicates the account. Some of them like I think the Vanguard one has changed the name of like the Vanguard Growth Fund to Kangaroo or something like that know 

Alec: [00:22:05] To these days like Vanguard has its shares is have a raise have a I'm sure a heap of others have it but they're the ones that come to mind. Yeah. More and more product issuers are bringing it to market. 

Glen: [00:22:18] And that's the whole thing. Like the product issue is it's just a function of how you can invest for kids. It means that they can have more fun on their platform or more trades. But when I was researching this, I actually emailed the support team of a couple of his product providers and they didn't know actually much about the law and how it's actually supposed to be set up, right? So yeah, but these. These people are like they're either programmers or developers or just the support team going, Oh, how do I find my statement like good people, but they, they don't know the ins and outs of how an informal trust works and a product provider provides the product. That's awesome, but it's your responsibility as the user of that product to make sure that it is set up in the right way and that you are disclosing things correctly on your own tax return each year. 

Alec: [00:23:12] So before we get into the details of that, start high level and give us the sort of the pros and the cons and how you think about it. 

Glen: [00:23:20] Yeah, well, I'll even start further high level if you had an account as an informal trust and we'll take Bryce. If your dad had an account with a superhero back in the day and he set one up that said superhero just for Bryce on the statement, it would have Daddy lists, papa list and then in brackets it would have some type of designation like Bryce lists account in brackets. So it's a designation that daddy list is the so I'm just used to calling him daddy. I'm sorry he's the informal trustee this money. Yeah, right. And then basically what happens is he controls the money but it's the benefit is for Bryce. Now, when that minor turns 18, the money can be transferred into your own name. And because the beneficial owner hasn't changed, it's still Bryce. There is no capital gains tax. 

Alec: [00:24:22] Oh, okay.

Glen: [00:24:23] So there's no. And this is You know, one thing we need to go back and just high level when we talk about capital gains tax and I can use it as property because that's a real example that many Australians understand, right? If you bought a property and investment property and then sold it and it grew in value or a parcel of shares, right, that triggers a capital gains tax event because it's been purchased or sold. Right. The only reason it triggers a capital gains tax event is because generally when you buy and sell assets, the owner is changing. So you might have heard scenarios where a family home, there could have been some estate planning stuff done and the solicitors have transferred the name into the lower income earner spouse's name or the non-business owner's spouse's name. And because the beneficial change hasn't really happened, it didn't trigger stamp duty. Have you heard that kind of thing, where you can you can make changes to assets and stamp the stamp duty isn't triggered because there's actually no beneficial change in ownership. So that's really important to understand. When the child turns 18, when it goes into their account, no capital gains tax. And I'm repeating get in because there's no beneficial change in ownership. 

Alec: [00:25:41] Okay, So while we're talking about the tax side of things, if you are doing an informal trust, the kid needs a tax phone number, is that right?

Glen: [00:25:49] Yes. So we'll walk back a little bit because this is where it starts to unravel pretty fast for a lot of people in Australia. There are tax rates for minors and they're very punitive, like it's savage. 

Alec: [00:26:08] Like Two thirds above 400 and something. 

Bryce: [00:26:10] So 67. Yes. So here is Yeah, Yeah. 

Glen: [00:26:14] So here is the rights, right from 0 to $416 nil tax. 

Alec: [00:26:20] Yeah.

Glen: [00:26:21] So in my tax return each year will from a family trust my nieces and nephews both receive $416 a year tax free. Okay. And they get that money anyway because it goes to them between 417 boys and 1307 dollars the tax rate, 66%, okay, over 1300 dollars a year, 1307 dollars a year. The tax rate is 45%. So put a medicare levy on that. That's 47%. So what we look at is if you're investing for your child and there's dividend income, interest income and it's over 1300 a year, who decides the highest marginal tax rate? 

Alec: [00:27:09] Yeah. And people might be wondering what the policy reason for that is because like, what are we just trying to stop kids getting a job at the local? Okay. It's to stop rich parents stashing money in their pockets. 

Glen: [00:27:20] Yeah. So, gosh, even when I was a child, my parents, before the trust law was changed because they had a discretionary family, trusts they could distribute $18,000. Wills 8200. Today we'll just call it 18 grand to me, my sister each year tax free. 

Alec: [00:27:37] Because that's the adult tax free. Yes. Yeah. And that was that. 

Glen: [00:27:41] Yeah. So basically they've changed it all and it's called unearned income. Now accepted income is income. That's from a job, from a testamentary trust, damages from injury. But I want everyone to park on this number here. If you had $5,000 invested for a minor or anyone earning 6% per year, that's $300. Okay. So that is under the $400 tax free. $10,000 earning 6% is $300. Right. So to get over this 1300 dollars, the highest marginal tax rate, like you have to have some significant wealth to generate that type of income. Right. So that's just a bit of a sidebar.

Bryce: [00:28:29] So are those rates applied if there's a capital gains event, like if you're transferring to a scenario where you're investing for yourself. 

Glen: [00:28:38] Yes.

Bryce: [00:28:39] Under your own name and then I'm transferring to Ren's. 

Glen: [00:28:42] Yep. 

Bryce: [00:28:44] That's going to be a capital gain for you. For me? Yes. At that rate. 

Alec: [00:28:48] No, no, no, no, no. Because you're the adult. You're the adult, right? 

Glen: [00:28:51] Yeah. Because you're just disposing an asset who has it is after the fact. But what I want to get to is with an informal trust. The reason, I think 90% or more, 95% of people and this is anecdotal from reading stuff online, people are not setting up properly. They're not setting up ATF in the minor. Yeah, because you have to think about if we go back to beneficial change of ownership and the beneficial owner if you ran a sorry Alec had $100,000 and you had it on trust for Ren. Right. And that generated six grand a year in income. If rent is the beneficial owner of that money, that six grand a year of income. Whose tax file or whose return should it go on? 

Alec: [00:29:47] Well, I assume the answer is the beneficial owner. 

Glen: [00:29:51] Yes. But what's happening out there in the wild? A parent is setting up these sub accounts as an informal trust, not setting up a TFN for the child and just putting the income from the kid's investment on their own tax return. So? So I'm getting the income for it. Who's really the beneficial owner?

Alec: [00:30:12] So are they then just arguing that they're just investing in their own name like from a taxpayer. And the idea of fine with that or.

Glen: [00:30:19] Well I think it's actually murky and yeah, it could just look like they're investing their money. Yeah. And if they move it to the child after age 18 and not disclosing it and not paying CGT. Well it's probably not correct because they need to, because they're actually disposing the asset and moving it to the child. 

Alec: [00:30:38] So really, the choice is between these first two options. You invest in your own name and then you just pay your marginal tax rate, which is likely lower than the kid's marginal tax rate. But when you then transfer the assets, there's a capital gains implication. Yes. Or you to the informal trust route. You pay a higher marginal tax rate on the investment returns, but there's no capital gains. 

Glen: [00:31:02] If he's transferred to the minor. So what I've results. 

Alec: [00:31:05] What is the better option.

Glen: [00:31:06] Here's a question, right? Most of these might end up on a 35%, you know, mid-thirties tax rate. Right. So if you had some family wealth. So parents and a minor. Would you want to pay income at 47% for the miners income if it's a fair chunk of money. Or your tax rate at 30%. 

Bryce: [00:31:36] Or your own tax rate. Yeah.

Glen: [00:31:37] Yeah. So I've kind of hypothesised that. If you've got an informal trust, you probably want to be on the highest marginal tax rate. 

Alec: [00:31:48] I guess there would be tipping points in all of this. 

Glen: [00:31:50] Oh, absolutely. 

Alec: [00:31:51] Like what you expected saving on the capital gains. 

Glen: [00:31:55] Yeah. But it's fine to, like, do what you want, but you've just got to make sure you do it right. Now, one strategy could be if you are investing in the miners name, quote unquote, as an informal trust, have like low yield investments or Literally put the money in some Speki. Just that isn't actually producing any income at all. Sure. But you may need to still do a tax return for the miner each year to get franking credits and foreign tax offsets. So all I want to say is with having an informal trust, you've got to set up miners tax file number. Make sure the miners, if and this is where the product providers couldn't tell me. One of them said, yeah, you can put the miners tax on number in on the app. And I'm like, No, you can't. I'm looking at it and then write back, Oh, yeah, you're right. Sorry. You can't like. So you've got to really make sure that the miners tax file number is on the platform or the brokerage account or the app. And as well, if there is some auto face the ATO, this could be data matching issues as well. So it's just gonna be cleaner if your ETF hands on yours, the minus two if ends on theirs and then you do your returns each year. Yeah. Another thing is. So some disadvantages of that is, you know, the tax return for the miner each year. And a lot of us, when we get started investing for miners, it's going to be superficial amounts over the year. Right. So do we want to set up a tax on number and do a tax return for the miner each year? I don't know. The one big thing that I need to dispel is I don't do naughty, naughty is if you had a miner account invested in shares or whatnot as an informal trust. So I pop a list as trustee for Bryce Leske. This is his investment account. Bryce needs school shoes. I take the money from the investment account. All Bryce's school fees. Take the money from the admin account. Those funds are not expenses for Bryce. They're the adult expenses. So you can't take money out of the investment account and spend on the kid because they're an expense of the parent. So when you actually look at this stuff, I honestly think it's less enticing to do a a an informal trust. And that's why I'm just like, I won't do it when I have kids not doing it. 

Alec: [00:34:50] Yeah, it feels I mean, like everyone make your own decisions and do your own research. But for me, the changing the name of my Speki account to my kids and I'm doing it all in my own tax environment feels like the simplest. 

Glen: [00:35:02] Yeah, it's just easier. And like, who knows? Like I told my nieces and nephews, well, I've told Grace. I said, Look, this money's for you. But also if you're ratbag and a doing hard time for taking, you know, all of it and it's my own family. Yeah, we're back here without you. 

Bryce: [00:35:21] So there are a few other considerations but we'll, they're all including the blog post which we'll put a link to in the show notes. So that's the first to. Glen, let's move to the third, which is the investment bond, which includes education bonds. We have had a couple of questions specifically around education bonds from the community. So I think this is one of the interests.

Alec: [00:35:43] Well, yeah. I also think that this is the choice that you made for Grace. Grace is getting a good run on this show. Shout out to Grace 

Glen: [00:35:49] Well, I'm Grace. She's a huge fan of you guys. 

Alec: [00:35:54] Um. So I guess tell us about the investment bond, education bond and why that was the decision you made when, I guess, when Grace was born early in her life. Yeah.

Glen: [00:36:03] Okay. The reason I chose an investment bond for my niece and nephews was purely the estate planning like that, was it? Well, and there was some other secondary things, but have you seen online like you get some investment and money purists where they're just so disgusted with the investment bonds? Like, do you know concept how they were? 

Alec: [00:36:29] Like I think a lot of people when they hear investment bonds think, you know, like corporate bonds or like government bonds. 

Glen: [00:36:35] So it's not that. So let's take it back and I'm actually going to draw it for you guys here.

Alec: [00:36:41] If you're watching. Oh, yeah. Watching on YouTube. 

Glen: [00:36:44] Do you guys even do YouTube? 

Alec: [00:36:45] Yeah, yeah, yeah, yeah. We stopped for a while, but we're getting back into it. 

Glen: [00:36:48] Fancy. 

Alec: [00:36:49] If you're just listening to the podcast, we'll know, right? The draw. Yeah. 

Glen: [00:36:53] So forget the name investment bond for now and just think insurance bond because that's what they are there in insurance bond and they were the most horrendous products in the world. So back in the day they had these bonds right And they'll call an insurance bond. And basically the individual would pay money into this insurance bond. And within this structure there was a savings account. And within this structure, there was a life insurance policy. Okay. And what would happen as your younger life insurance is cheaper, right? Because there is less chance to die. You put money in this savings account? It'd be getting like 2% or some crap amount, and that would just keep building. And each year the life insurance premium would be paid out of the internal savings account. Right. And then this whole tax structure here is taxed at the company tax rate of 30%. Now there are some carve outs with death, cover and tax in Australia, so forget that for now. That insurance bond is taxed at 30% the company tax rate. And what happens is as you got older, the life insurance premium would also increase. But because you had heaps of cash building up, you could still pay the same amount each month because the insurance would continue to get funded. So an investment bond is basically the same structure and you put money in this account. But instead of there being a savings account and a life insurance policy, you've got your investment options. So the technology has allowed this tax structure being an insurance bond to have investments. Now, the thing is, the investments are taxed at the corporate tax rate at 30%. And because it's its own policy, it's an insurance policy that does not sit on your tax return. And each year the bond is taxed internally at 30% company tax rate. 

Alec: [00:39:03] And are you doing a tax return for the bond. 

Glen: [00:39:06] No, all internally? Yeah. So the thing is, so you know how each year, for example, you get an ETF tax report and it'll tell you the flow through of like CGT and all this. Then you put those amounts on your tax return and all the categories, right? And it flows through to you. Capital gains tax, all that with the investment bonds or insurance bond to be technical will say investment bonds each year. Profit 30%. It's like if you had company, like if Equity Markets Proprietary Limited had an investment that was growing any income, 30% tax, capital gains tax. Can't get any benefits. 30% tax. So you think an investment bond internally taxed each year? So I don't put it on my tax returns. Tax taking care of it is sometimes less than 30% because they can add back franking credits and all that stuff. And a lot of them say they're around 22 to 25%. Like my one just has the Vanguard Diversified High Growth Fund in it. There's a heap of different options. You can build your own portfolio. 

Alec: [00:40:10] I was going to ask that. Yes, you can direct the investments. 

Glen: [00:40:13] Yeah, but I just want to do multi fund. Shut up and take my money type vibe. And so you think like. In your own name if you had Vanguard Diversified High Growth Fund. And it was growing like you're going to pay less tax year on year because the CGT can fall through to you on your individual name. But if it was in a company structure, you'd have less money year on year because it's getting taxed more and the money isn't around long enough to be invested because it's getting taxed. So it makes sense. You just think year on year Company tax rate. Yeah. After holding the bond for ten years, any money taken out of it is tax free. 

Alec: [00:40:51] So just there. Why ten years? 

Glen: [00:40:54] I don't know. I think it's just the notional thing that they they did to. I don't know then.

Alec: [00:40:58] So if you pulled it out after five years, what would it be taxed. At your. 

Glen: [00:41:03] At your Own tax rights as income, I think.

Alec: [00:41:07] Get a get for sure. There's a four year tax.

Glen: [00:41:11] Oh, yeah, yeah, yeah. And the difference is with the education bond. Exactly the same thing that if you pull money out to invest or to pay for education for the child or grandchild, you don't pay tax on it. 

Alec: [00:41:25] So then it's less about the time and it's more about the purpose. 

Glen: [00:41:29] Now, would I personally invest my money in an insurance bond? I actually do have O Sorry, but I don't really put that much money in there. It was just the reason I did it right was in overflows, that extra superannuation account. 

Alec: [00:41:47] Okay. 

Glen: [00:41:48] Because I was capping out my super eight year and I'm like, Hey, I can just have my investment bond as a little extra. 

Alec: [00:41:55] It is something I wonder about because it's not something I've been super familiar with, but I've heard more and more about it maybe over the last year. And it's we're talking about this in the context of investing for kids. Yes. But if I'm thinking like as a long term investor and I can direct the investments and after ten years, I can pull it out and not pay any tax other than what's already paid over the years, why wouldn't I just set them up for myself? 

Glen: [00:42:18] You can, but I think you'll find the investment options can be restrictive. And it's kind of I just see mine as a secondary super block. I actually can't touch it. You know, I don't have Vanguard diversified high growth in any other investments in my name. Okay. Like, I just don't use it only in the bond because it was a one stop shop. Actually, when I sent the form into my provider, so I stopped putting money in the kid's account each month. This was frickin three months ago. Still coming out. I was going to turn mine off as well. But back to the sole reason why this could be an appropriate option for miners is, one, it's off your tax return. It's out of sight, it's out of mind. And this is the purists. Hello, love you. But also he's some practical thinking. The purists will say that having an ETF in your own name will be better off in terms of tax for long term. Right. You probably right. However. If it is in your own name and you are tempted to get your dirty mitts on it to buy a new lounge. All the tax saving the world isn't going to stop that happening. That's right. So that's why for me, having it in out of sight, out of mind, number one, could be an option for those parents, for kids. Number two. For people like me who are investing on behalf of other kids. It's a way that I've got some estate planning mechanisms. So if I die, that money's still allocated to the kids. And that's why you can't actually just say, I you should invest it. This will get you the highest return after tax. That's a fool's game because you have to look at your state planning considerations and your ownership structure. So I don't buy into these things that no one should use investment bonds. Every product has a place and a time. But I will say one thing The pros and cons of all these options that we're doing right, the pendulum between pros and cons, I believe, swings the most with investment bonds. So the cons will swing really wide. The pros will also swing really wide. Where? So that's kind of where I think investment bonds land. You talk to anyone who works at an investment bond place that the best things in the world. Obviously the people still say duh, but like, I don't put wholesale wealth in them for myself or my kids.

Bryce: [00:45:01] To close out your question, Ren, what why the ten years and what happens when you withdraw before? So if you withdraw within eight years, 100% of the earnings on the investment bond are included in your assessable income. And there's a 30% tax offset within not with withdrawals in the ninth year. It's two thirds of the earnings are included withdrawal in the 10th year. A third of the earnings on the investment bond are included. And then after the 10th year is where you get all returns or earnings are invested on the investment bond tax free. 

Glen: [00:45:36] I mean, they are a really good tool for ultra high net worth. High net. 

Bryce: [00:45:43] Worth. That's what that's kind of what we figured out when we think about it's like if you're in that high tax bracket.

Glen: [00:45:52] And, and that's why I had it as a second superannuation account. Yeah, because. And because. Hi, I'm Glen. I'm a recovering spender. It has to be out of sight, out of mind for me. 

Bryce: [00:46:03] Yeah, but how do you actually buy them? 

Glen: [00:46:05] I can go direct. 

Alec: [00:46:07] Like is that they're like certain way. 

Glen: [00:46:09] Yes. So the one I use is Gen Life. 

Alec: [00:46:11] Well, you've, you haven't exactly given them a glowing review. 

Glen: [00:46:17] Their friggin admin team can pull that. 

Bryce: [00:46:20] So just to be more specific here, I guess there's no like, there's no sort of superhero or broker equivalent where there's a one stop shop and you can kind of fight. You need to go, Yeah, Google out. And. 

Alec: [00:46:30] And they all are paper based forms by the phone. 

Glen: [00:46:33] Oh no, they're changing now. Okay.

Alec: [00:46:35] I was gonna say. 

Glen: [00:46:35] Say, but you've got to remember that, like these insurance bonds, they've been around since the dawn of time. And so these are just legacy companies that are like, becoming more efficient with technology. I mean, able to strip out the crappy savings, strip out the life insurance, and just put an investment inside the vehicle. I think there is very low legislative risk that anything would change with these things because they've been around forever and the government are getting their tax year on year. So yeah, and this goes back to like the pendulum with these things, it will swing the most for good and bad. But for those who are looking for their nieces, nephews or grandchildren, I used to get a heap of these up for my clients that were retirees or transitioning into retirement like everyone do. They will throw 20 grand in each bond for the kids, done Because you still own it. It's still yours. But if the kids play up, you can just remove their name and it's yours. 

Bryce: [00:47:34] Nice.

Alec: [00:47:35] Hang on. Hold that of your kids. Let's take a quick break. And then on the other side, we're going to talk about Super, which I'm interested in formal trust. And finally, experience is. Welcome back to Equity mates. We're talking to Glen James, the host of My Millennial Money, the founder of the financial podcast Empire. Well, it's not it's not just financial, is it?

Glen: [00:48:01] No, we do career. So, yeah. So Dev has the my millennial money professional. 

Bryce: [00:48:13] Professional. 

Glen: [00:48:13] Just for professional. 

Alec: [00:48:14] Okay. Yeah. Yeah. Well, today we are talking about investing for kids. Glen, you've done a lot of work on this. There's a blog post and a couple of your podcast episodes in our show notes. If people want to go deeper. We've covered so far investing in your own name, informal trusts and investment and education bonds. Let's go to remember what we've covered. The next one is superannuation. And you said when we were setting this up at the start, opening a superannuation account for your kid, which is something that I've never heard anyone say before or anyone talk about before. So I'm interested to hear that. Talk to us about super for kids. 

Glen: [00:48:51] You know, at the start how I talked about investing in your own name. Okay. If I'm going to invest for my own kids. Right. Picture this. I'll be in my forties if I spawn. Right. Fact of life. I'm 39 now. Right. The preservation age for superannuation is age 66. If you 65 retired and 65. If you complete 65 regardless. Okay. So if I had a child when I was 45, I could set up a second super account. In my name or even my same super, but I'll do actually second one and set up another super account in the name of Glen James Beneficiary 100% to the child investment option, high growth and just pump that. Now I would have to do that with my non-concessional contributions out of the $110,000 E cap. But that money is growing in the most tax efficient vehicle on the Australian mainland. Including Tassie, I guess. And then at age 60, the kids are 20 anyway. Tax free baby. Like, what's the problem here? And the estate planning is taking care of tick. The money that goes to the kids because you put money in in post-tax dollars, they're not going to get taxed on that if you die. So it's for those parents who are late thirties, early forties, and you want to invest in your own name, can you set up a separate super account? Dedicated. Now you can't change your mind. Get the money out. But, hey, we all talk about, Oh, we want the long term investment and how many people set up a long term investment and three years later, withdraw it anyway. Don't answer that. 

Alec: [00:50:42] I guess the thing here, because you will be paying like double sets of face there, but most fees are a percentage. So you still. 

Glen: [00:50:49] Can. Yeah. Like sure smaller amounts but the tax saving. 

Alec: [00:50:52] Yeah. And I was just going to say make sure you turn off the life insurance. Yeah. 

Glen: [00:50:56] Yeah. You don't have any of that. 

Alec: [00:50:57] All that stuff. Yeah, yeah, yeah. But it's an interesting concept and one that I haven't heard anyone really. Yeah, I guess. I guess the challenge is so Brice is 31. 32. 

Bryce: [00:51:06] I'll take 31.

Alec: [00:51:07] You are 32. So if you were going to do that for the kid that you have in the next 12 months. 

Bryce: [00:51:14] They will be. Getting that when the minimum 30. 

Alec: [00:51:17] To your age now. Yeah. Yeah. 

Bryce: [00:51:20] So the government doesn't change anything in the next 32 years. 

Glen: [00:51:24] I think they're going to keep the limits of it for a long time. 

Alec: [00:51:26] I can. Yeah. 

Glen: [00:51:27] I would like preservation ages.

Alec: [00:51:28] I would bet you might not be as I said, but, but like they'll raise the price down surely. 

Glen: [00:51:35] Maybe. 

Alec: [00:51:36] And I reckon by the time we retire it will be. 

Glen: [00:51:38] It's 65. 

Alec: [00:51:38] Now. Caveat, we always get this wrong. 

Glen: [00:51:41] So yeah, I don't think they'll change it. People get confused and this is a tangent. People get confused with like eligibility for age pension and superannuation preservation. Age and age 67 in Australia is not retirement age. That's the age that you can qualify for. Age, pension. Pension. Yeah. The retirement age in Australia. Do you know what it is? Actually 85. You know what it is. 

Alec: [00:52:06] Is that not right? 

Glen: [00:52:07] Well, the retirement age in Australia is whenever you want. But the question is how are you going to fund it? Like so that's the Yeah. 

Alec: [00:52:15] You, what you're saying is if you retire at 40. 

Glen: [00:52:18] Retire 40, where are you going to get money. Can't get it from. See if it's got to be somewhere else. Yeah. So yeah. The, the key numbers Super age 60 if you stop working age 65 regardless and age 67 for age pension benefits. So I don't think and I haven't heard any chatter of superannuation release ages being increased like he chatter about taking age pension to 70. Not sure. I don't know if he'd get up, but who knows? 

Bryce: [00:52:48] Well, here's something I've been thinking about for the day. I do have kids, not anytime soon, but like when you would actually hand over the money to your kids. 

Alec: [00:52:58] I've got thoughts on this. 

Bryce: [00:52:59] Because I reckon handing it over, it's like, Oh, you're 18. Here's what I've been saving. It's way too early. 25 to early. I reckon now is when I'd be like he's 30 years of. 

Alec: [00:53:09] Yeah. But I also think there's nothing like it's the parent's money, whatever. But like there's nothing more coercively controlling than parents putting all these strings on. 

Bryce: [00:53:20] I wouldn't tell them that's the. 

Alec: [00:53:21] Other until they're like 40. And it's like, you know. [00:53:23][2.2]

Glen: [00:53:23] There's no, no. 

Bryce: [00:53:24] Strings on. You got.

Alec: [00:53:25] To like, work in the job or, you know, do what? Do what I want you to do and live the life that I want you to do. And there's this big money. That's it. 

Bryce: [00:53:34] Yeah. But again, I wouldn't be hanging a bag of money out of my. I would genuinely not tell them that it exists.

Glen: [00:53:39] There's nothing more needed in this world than three white single males talking about parenting. I will say, you know what I've done in my will? I've basically set my estate plan and will up that if I check out, each kid gets a couple hundred grand. Right. However. After age 30. If they're not on drugs, they're not in jail. And all that stuff. That's good, because when we think about that, we've just talked about retirement age, right? Like 65 or 67, whatever that is. Right. From 65 to 75, in this day and age, it's no longer old. It's called the Lifestyle Years. So everything's moved ten years. And as to your point, right, like there are still 30 year olds living at home. So, yeah, I think I think my my investment bonds for the kids say age 25 is my intention that they get that. But the will definitely is age 30. 

Alec: [00:54:50] Hmm. I don't have a will. I probably. 

Bryce: [00:54:51] Should. Yeah, that's in the whole nother conversation. 

Glen: [00:54:54] Let's say if there's a will, there's a relative. 

Alec: [00:54:58] So. So let's just. Yeah. 

Glen: [00:55:00] So superannuation. Yeah. Yep, yep. So there is no mention in superannuation law that there is a minimum age requirement for retirement savings account to be opened now. Superannuation funds are effectively products and there's effectively a trustee. That's kind of how it works. Superannuation doesn't form part of your estate, so if you die, it's not dealt with in the will. However, it is at the discretion of a product provider to offer accounts for miners. I know at the time of recording Australian retirement trusts do a minor account, but what you'll have to do, you'll have to get this. I'm actually thinking about actually doing this and I didn't. So I don't want to stop spending money on my kids or my sister's kids, but I'm actually just as an experiment over the next 30 years, I'm tempted to get Lauren to set up the kids a tax on number and then put ten grand each into a super account for each kid just to set it. And then just see what happens. So like when they're like 24 or 25, everyone like, how much. Are you going to see? They're like 55, baby, like. So that is a way that you can build wealth for the kids, but you just need to know like they can't touch it. 

Alec: [00:56:21] I think when parents are thinking about how they want to help their kid, it's not that they want to help their kid have a more comfortable retirement. Yeah, they want to help their kid buy a house. Yes. Cover that you need so that. 

Glen: [00:56:34] However, I do like this strategy from an estate planning purpose and potentially if there are high net worth families or individuals. So like when you end up telling everyone you won lotto like your $100 million rent when you have kids. Yeah. Use the non-concessional cap. Put 300 grand in each kid's super account. Done another few years. Just pump that up. 

Alec: [00:57:01] I'm going to coercively control them and say this money's here for when you're 40, but you have to call me once a week. You have to come round to the house once a month and have dinner with me. Like that's how I'm going to keep my kids in my life. 

Glen: [00:57:13] But yeah, so you've just got to use caution. You know, if you're not established in your own financial life, it's that kind of, you know, when the plane's going down and everything's on fire. Put your own mask on first before you worry about kids. I don't think investing with kids is appropriate if you've still got consumer debt. I don't think it's appropriate If you're still trying to get an emergency fund together. Like you need to get to a base camp in your own life. However, if you do want, do the superficial amounts just to educate them. Awesome. Yeah. That wholesale investing. You know, it.

Alec: [00:57:51] Like this has been my sort of take away from the conversation. It does feel like it's a privilege conversation to have like it's totally it's a lot of this, you know, like talking about investment bonds they're great strategy for people high net worth people setting up a super fund for your kids. It's a great strategy for people who are high net worth so. Mhm. The name of the game is to become a high net worth I guess. 

Glen: [00:58:13] Giddy up baby. So there's. Yeah. I think that's probably not an option that people should run to first unless you've got spare money and you want to have a bit of fun and do a social experiment like want to do. 

Alec: [00:58:25] What would be interesting is if you could set up a super fund for your kid and then start putting money in for the first home super saver scheme from when they were young.

Glen: [00:58:36] I'll take this on notice, but in my mind I thought there had to be concessional contributions and you can only do non-concessional for a minor. Okay. Because I won't be working because the first time super save scheme is basically you put money in pre-tax. Yeah. You take money out, get a tax rebate and you can basically save up to six or so grand. So I would have to research that. 

Alec: [00:59:01] All right. Bad idea. Let's move on. 

Glen: [00:59:03] Well, I know enough to be dangerous about everything, and then you've get the question like that, and you're done after on my head. 

Alec: [00:59:09] No, I think, like, for me, like the financial planning conversation, the structuring and all of that is like a conversation that, like, I'm just not nearly well-educated enough. I'm like, be getting cash, finding good investment opportunities. That's a conversation that is is much more in my wheelhouse. And so when it comes to all this stuff and we're about to talk about formal trusts and again, that's going to be something that it's like this is just another world in another language. 

Glen: [00:59:34] And that's why you have to really be careful with anything online, whether it's, you know, medical advice, whether it is vaccine advice, it is, you know, referendum advice. I don't know. Like, you've got to really understand that if someone jumps on and he's like, don't use investment bonds because the tax write these and wave crunched these numbers and all that. It's like, shut up. What if this person needs it for their nasal nephew? What if this person has a unique estate planning issue? What if this person has a blended family and we actually need to protect some wealth? Like there are too many considerations. And, you know, as a former financial adviser, you'd spend an hour with a client with a whiteboard just getting the whole picture, all the goals. And sometimes, categorically a solution would be perfect. That wouldn't be perfect for other people. 

Glen: [01:00:27] And you might I've taken the view that, sure, I might not get the most tax efficient vibe having some little investment bonds for the kids. But for all the reasons that I want, it works. It works. Yeah. And I'm happy to align the bit I make for myself.

Bryce: [01:00:44] Well, let's move Glen to the fifth, which is formal trusts. We've spoken about informal successfully. How do these differ and then what are the pros and cons?

Glen: [01:00:53] Yeah, so they don't differ in terms of the concepts. Okay. Have you guys got Discretionary Family Trust that owned the shares in equity markets? Yeah. Yeah. So. It'd be like exactly that. You set up a discretionary family trust, you would likely have a corporate trustee. You'd likely have a trustee that is formally drafted that would set out the benefits or the purpose, rather, of what this trust is for. And on the schedule you'd have primary beneficiary Johnny Junior, Mary Junior. And basically so like, do you guys invest in your trusts? So I don't hold any investments in my own name. 

Alec: [01:01:39] To hide it from the tax. 

Glen: [01:01:40] Authority. No, you can't hide anything. Just food, asset protection. Best practice. Like my trustees, my wealth creation vehicle for life. And I've got some properties in my own name, but they've got a bit of mortgage against some of them, so there's some protection there anyway. And, you know, properties and other thing you can be useful to have that on your own item. But the formal trust is you literally setting up a company. So like my share investing account is owned by the trust. When I said I don't have any investments, I'm not in the investment bonds. They are not in my name. They don't sit on my estate. They're like separate superannuation. So the only real things I own is one car and the clothes on my back. 

Alec: [01:02:28] So in that instance, like you're the trustee and the beneficiary. 

Glen: [01:02:32] So corporate trustee means there's a company that is the trustee of my trust. 

Alec: [01:02:37] But you're the only shareholder in that company. 

Glen: [01:02:40] And my discretionary family trust. It basically says primary beneficiary Glen James, secondary beneficiary, family members, nieces, nephews, whatever. And the nature of a discretionary family trust that wealth is invested. And he's held for the benefit of Glen so that I'm the beneficial owner. Now, in Australia, a formal trust, a formal discretionary family trust. You have to distribute the profit each year to the beneficiary. So that means then if I've got a formal trust and the beneficiary is child one at the end of the year, the money flows through to child one and that money has to fall on the beneficiaries tax phone number. Capital gains tax can flow through the trust as well to the beneficiary. So in that light, this is why you've got to think the informal trust. Why are parents claiming the income on their own? ETR Where if it was a formal trust the income would be claimed on the beneficiaries? 

Alec: [01:03:47] Here it is for people whose income tax returns. Yes, just a flat. So then what I'm getting from this is that a lot of the considerations we had with the informal trust are here. Again, you're paying a higher marginal. The kid is paying a higher marginal tax rate, but then it's an earned income. Yeah, but then it would be the same like when you transferred the assets from the trust to the kid, there would be no capital gains. 

Glen: [01:04:12] There'd be no beneficial change of ownership. So no capital gains. But in theory, you shouldn't need to ever transfer it because it's a formal trust set up for the kids benefit. 

Alec: [01:04:20] Yeah, yeah, yeah. So did you. 

Glen: [01:04:22] Change the. 

Alec: [01:04:22] Trustee? 

Glen: [01:04:23] Yeah, I could be a director of trustee company or become a trustee. 

Alec: [01:04:26] Yeah. Okay. 

Glen: [01:04:27] Yeah, but I mean, that one there is also for significant wealth. 

Alec: [01:04:31] Yeah. So when Like, when we talk about, like, trust fund kids, it's quite an American term, but this is what we're talking about. But I guess the difference because in America, like when you talk about trust funds, it's often they get no money until that certain. Yeah.

Glen: [01:04:44] Like setting age almost. 

Alec: [01:04:45] Whereas in Australia the trust can't retain the assets. Cannot they have to pay them out.

Glen: [01:04:52] If they do. It would just get taxed at punitive rates. 

Alec: [01:04:55] Okay. 

Glen: [01:04:56] Yeah. Which I don't have a through my head. It could be up to 60% if it's not distributed. Yeah, I definitely know. It's obviously going to be at least the highest marginal tax rate of 40. Yes. 

Alec: [01:05:05] Okay. Yeah. Do you have anything else on formal Trusts or otherwise? Let's get to experiences. 

Glen: [01:05:10] No, I mean.

Bryce: [01:05:12] The cost of running it. 

Glen: [01:05:12] Yeah, well, you're effectively setting up a separate entity. Yeah. So it could cost a grand or two to set up. You would likely get a bank account in the name of the trust. You'd get an investment or a brokerage account in the name of the trust. Every year you'll have to have an accountant do the tax return for the trust like you guys do. And so it is really you just setting up an investment vehicle that is separate and likely going to be for someone who has significant wealth. Now, a testamentary trust will just cover that if you've got a will. You can actually have what they call testamentary trust provisions in the will. So if I had my own kids and I was to check out early, I could say in the will, please set up a testamentary trust with $1,000,000 for the benefit of the two kids. Now, the income that comes from that testamentary trust. Is taxed at accepted tax rates as an accepted person, which is the normal adult tax rates. So for financial planning, we used to always really talk to our clients about who had significant wealth to set up a will with testamentary trust provisions because it can be a very tax effective way to manage your wealth in the event of your death if you've got kids under 18. Yep. And there's also a special disability trust. So if you've got a child with a significant disability, I can look up ATO special disability trust rules or whatnot that also that income can also be classified as an accepted person for that income. So it's not at the rate. 

Bryce: [01:06:50] 66% or.

Glen: [01:06:52] Whatever it is. Yeah. So you get the full 18,200 tax free threshold. 

Alec: [01:06:58] Fascinating. All right.Last but not least, investing in experience at number six. 

Glen: [01:07:04] Yeah, this is it, guys. Like, what did I say? Live and let loose. Live and let live. I don't know. Like just live. Just build wealth and take your kids on holidays. Do fun stuff with your kids. And this is the area where I can give advice on how to parent your child or whatever. But you know what's good for your kid? I said when I was growing up, would I'd rather go to Bali or Queensland holidays or had money? I'm glad I did the holidays. Show it. Be cool if, you know, most parents taught their kids about managing money. And that's why I think this generation of parents who are listening to our podcasts are going to have the conversation to really help educate their kids, like teach kids how to fish. Don't give them fish.

Glen: [01:07:53] So it is that investing in experiences and I kind of as a tongue in cheek thing, like said in my podcast episode about this stuff was like when you are planning on these investing for kids and experiences. Like delegates, like, Hey, Ren, Junior, can you we're going to go to Europe in two years or whatever. What's two museums that we should go and look at? Jump on line and so get them involved in the experience. Yeah. That's about as far as I delve into giving parenting advice, I'm afraid.

Bryce: [01:08:27] Farkle. I like it. It's a good way to end it. Yeah, I look fondly on. We would do an annual beach trip as kids that mum and Dad would save up for from Wagga. So I know beaches there. 

Alec: [01:08:40] I think fond memories. I think Scott Pope bought his kids a couple of sheep. H I think he tells that story somewhere and they then learnt like, you know, the cost of looking after the sheep and then they could sell and you know, all of that stuff and I think like that kind of stuff, like there's ways to teach your kids the value of a dollar outside of Isabella. 

Glen: [01:09:02] Yeah, one of the favourite things that I have about teaching kids about money and having them engaged is to do the matching, particularly for kids in their teens. It's not working. Matching. Yeah. So like you might have an amount and you say to the kids, Look, I'm going to teach you how to save money if you're 17 when we need to buy your first car, if you say five grand will match it with five. Gotcha. So we'll match whatever you save up to an amount. 

Bryce: [01:09:29] You've seen that be effective. Yeah. Is what you're saying. Yeah. Yeah. Interesting. Yeah.

Glen: [01:09:33] But you've got to put a cap on in case they really. 

Bryce: [01:09:36] What if they turn around and go. Yeah. So 25. 

Alec: [01:09:40] So I mean earning Kids wages like that. 

Glen: [01:09:42] Yeah. You'd be surprised Kids.

Bryce: [01:09:44] Yes. Some kids just will.

Alec: [01:09:45] Just start charging them rent. 

Bryce: [01:09:47] My parents did that as soon as I'm charging you right. Now, teaching you about money as soon as I finish school. And then I got a job to save to for like to save for a gap year and those sorts of things. And I started in a sales role, started earning some decent coin for an 18 year old. I remember they sat me down and go, Great, where you can pay crap all for them like it was 100 bucks a month or something. And I, I remember just getting so angry. I was like, This is b*llsh*t. Deal with it. All right. And what we do. 

Alec: [01:10:21] And that's why you move to Canberra. 

Glen: [01:10:24] I reckon what I would do if I had teenage kids and young adult kids living in my roof, in literally roaming the roof, living under my roof. I would probably do a percentage of Income for rent and household expenses.

Alec: [01:10:43] Geez, You know, is it hot arses?

Glen: [01:10:46] And I'll probably put it away separately and then back to them when they buy a house. 

Bryce: [01:10:51] So that's what I had in the back of my mind. I was like, This is just the thing for mum and dad. They're going to give it back to me at some point. 

Bryce: [01:10:56] They never got back.

Alec: [01:10:59] My my takeaway from all of this is like the goals are to build wealth as a family, to teach your kids financial literacy and then to like have the means to set them up for life. And like there's a lot of routes to that goal. And like if you're high net worth and tax considerations start to play more of a role, some of these, you know, additional super funds, um, investment bonds start to play more of a role. But for most people in most cases. 

Glen: [01:11:31] Most of the time.

Alec: [01:11:32] Most of the time, the first thing that you we, we spoke about just investing in your own name, building wealth and then like setting your kids up when you need them feels like the simplest.

Glen: [01:11:44] Yeah. Or do a little account with superficial amounts to train them and teach them about. Because I like with grace when I sit down, like I'll just gives to like, Oh do you know anything about shares? Not like it's like, how's it work? Well, you know how you like to buy stuff from JB Hi-Fi. Yeah, I'm like, Well, you can tell your friends you own some of that. What? And I. You pull that thread and it's like, okay, well, this is our business as well. Yeah, They've got to pay rent. They've got to pay their staff and they charge you for your iPad and they keep a bit of the profit. And then because you own some of that, like you get some of that profit. So yeah, it's been a really good discussion to have. Yeah. 

Alec: [01:12:22] So Grace obviously hasn't read your book yet.

Glen: [01:12:25] I bought a Sims book. They're actually going to write girls, I guess. 

Bryce: [01:12:29] We'll put links to both of your books. Glenn, you've got the career. 

Glen: [01:12:33] Yeah. So your career.

Alec: [01:12:36] Early for Grace to start thinking about a career. 

Bryce: [01:12:38] And sort your money out and invest and sell, right? Yeah. And invest. 

Glen: [01:12:42] You sort your money out. 

Bryce: [01:12:43] And get Invested. 

Glen: [01:12:45] Yes, Yes. Get started investing again. But this is the whole thing. Like, if I could rent to people, there's so many. Like we said all the time, all these people online, like I need to get the best return possible and all this stuff. I'm like, Seriously, the best investment you can make is in you and your career. Yeah, like weed out of.

Alec: [01:13:06] Yeah. An extra ten grand in salary compounded over X number of years. Like it's just. 

Glen: [01:13:12] You know, risk and reward with investing and then correlating that back to your career. So, for example, we'll just play the mind game now in finishing because it's an investing choice, right? I have a feeling I might I think I share this with you on my campfire chat, but I'll share it again. So if you had $20,000 invested over one year to turn that 20000 to 30000, that's $10,000 extra. That's a 50% return, right? Yeah. That level of responsibility to take. 

Alec: [01:13:45] That's. 

Glen: [01:13:45] -$20,000. Yeah. That's like

Bryce: [01:13:47] That's, that's just investing in the top five tech stocks. 

Alec: [01:13:50] Yeah. And like, technically. It needs to be like a 50% after half. Well, I guess it depends on that level. 

Glen: [01:13:58] So to, to grow your investment account, 20000 to $30000 in one year, you're at the spec e lottery ticket type. You don't want to be in that maybe with five or 10% of your portfolio, you don't want to be sitting there. But what you can do if you focus on your career and like I did a whole chapter in the book on risk taking with your career and work, and I did help stop that negotiation because that's a sport for me. If you use the same energy that you're digging around with, trying to get the best brokerage account and all that, to actually pay some attention to your work and what you lack and building a career you love. As you said, ran like if you get a ten gram pay rise, that's not only a one year return, but that's an ongoing ten every year. And to get that return, you're not sitting in nearly in the level of risk that you would need to take with your money to get that return because it's your career.

Alec: [01:14:57] Yeah. 

Glen: [01:14:58] And it's once you really start to think about the best income producing investment, you can actually invest in these in your own suite. It's on your wardrobe, it's the mirror like you are it. And if you nail that piece builder career you love, the money will follow instructions.

Alec: [01:15:20] Honestly, I just have bought a whole new set of clothes in my wardrobe. But I know what you say. 

Glen: [01:15:28] There's a cookery book if you want to update your career. 

Alec: [01:15:32] Nice one. Well, I think we've covered a lot of ground. I think if people want to invest for their kids, there's plenty of different ways to do it. And there's no one perfect way. I think the fact that you're thinking about investing for your kids in and of itself is a sign that you're on the right track. That's my concluding thought. Yeah. 

Bryce: [01:15:52] You guys know I agree. I think it feels like a lot of them are set up for tax benefits if you're in the higher tax bracket. Good on you if you are. But yeah, my takeaways, I think what we said, number one. Do it yourself. Build wealth for the family.

Glen: [01:16:07] Yeah. 

Bryce: [01:16:08] Figure it out when they need the cash. 

Glen: [01:16:10] My thing is, like, as. As much as I wouldn't invest in an informal trust unless you're on a higher marginal tax rate yourself. If you are going to do that, make sure your child has a tax phone number. And the income associated with the designation account is on their tax return and not on yours. Because if it's on yours, who is the beneficial owner? Because I don't own assets that I give away the income to other people's tax returns. Like it's as simple as that. And that's the whole thing. It all swings. Background When I started this episode with you guys, the concepts are the same. If you own an asset, the income from that asset falls on the owner's tax return. If it's in a trust, the trust doesn't pay tax, it flows through to the beneficiary. If it's an informal trust, the trustee being the parent doesn't pay tax, it flows through to the beneficiary, which is the child's tax return. 

Alec: [01:17:06] So I guess I know we were just wrapping up, but I've got to ask, like there would be a lot of people out there who have set up these kids accounts and then go to an accountant every year and the accountant doesn't blink an eye as they factor in that income that you're calling the informal trust income to the parents tax return. So like, are we saying all these accountants are getting it wrong? Like, what's the cause? There would be a lot of people who have heard this.

Glen: [01:17:30] Yeah, all I know is like this 12 page document that I did and turned into the podcast episodes and the blog and all that stuff. It's very detailed and it's probably the most nuanced thing. And shout out to Courtney and Hannah in the millennial money world, who helped me with this. I had all this stuff I went through with both of them because that said, I know enough to be dangerous. And we had Google talk. They were both commenting and they probably are still some errors in their little one percenters because it is so complex and so specific to your circumstances. Back to accounting, I'm not sure. All I know is you have to have a tax on number for your minor and you have to just clear that income on their tax return. And you can't use the money for anything else because you're the trustee for their money. If a trustee like.

Bryce: [01:18:22] I'm just going to go buy something. 

Glen: [01:18:23] Yeah. Like what would happen if we could take one step further. I died. The executor of the will could be seen as the trustee of that money to execute it. As per the wishes of the will. They bought a car with the money that's breaking the law. It's an abuse of trustee executive powers. Right. So yeah, it's complex. And that's why I really, really think 19 95% of people don't have this set up right with the designation accounts. And secondly, the product providers, because they just like we don't provide tax advice, nor should they. I don't think their systems are actually set up for their sub accounts to have the TFN added and flow through to the ATO for pre fill. Yeah, not sure, but all I know is the differences between the informal trust and the formal trust. Like the concepts are the same. You are a trustee, you go to beneficiary income flows through to the beneficiary and he's declared on their TFN. If the money moves out of the trust into the individual, there's no beneficial change of ownership, no capital gains tax. 

Bryce: [01:19:31] Love it. We will leave it there. So to close out the six ways where you can invest in your own name in an informal trust, in an investment or education bond in superannuation, in a formal trust, special disability trust, testamentary trust or inexperience. But Glen, thank you so much, will include links to the blog. Also the two episodes that you've done in great detail, one of which was a lot of Q&A from your second. 

Glen: [01:19:54] Our episode was literally just Q and A. 

Bryce: [01:19:56] Yes, yes, I'm sure there are plenty of questions to come out of this and the links to your books, but it's been an absolute pleasure. Thank you very much. 

Glen: [01:20:04] Thank you, Friends. See you soon. And if you're one of my listeners, shut up and get back to work.