Speaking in an investment insight, the general manager of investment bonds at Centuria, Neil Rogan said it’s never too late for investors to establish a savings and investment plan to cover children’s education expenses.
“Funding education for children is a problem that all parents eventually confront,” he said.
“Costs vary widely between the public and private sectors, but there is no such thing as a free education. The current cost of education can reach up to $30,000 pa for private secondary school fees.”
As such, the earlier investors start planning, the better. He advised mums and dads to consider the different costs of schools, what is actually on offer and whether extra-curricular activities are included.
Once a schooling system is chosen, caregivers should move on to building the investment portfolio that best aligns with their financial needs.
He said: “Your choice of investment portfolio should be influenced by a number of factors – but the most important is your time frame. The longer you have to invest, the greater the chance you will meet your goal, and the more flexibility you will have in choosing your portfolio. Investing is all about risk and return.
“The higher the risk you take on, the higher the return you should expect, but again, the time frame is all important. Equities, for example, which have historically performed well over the longer term, are more volatile over the short-term than some other asset classes such as fixed interest, making them better suited to the long-term investors.”
Continuing, he said investors should acknowledge that education is a long-term financial goal and as such any investment strategy should be one that allows for regular contributions is tax-effective, but also relatively low maintenance.
He argued that investment bonds “fit the bill perfectly” as they operate like a tax-paid managed fund.
He explained: “You can choose from a range of underlying investment portfolios and risk profiles, ranging from equities to fixed interest, cash, or a mixture of each, depending on the amount of time you intend to invest and your goal.”
The general manager added that children aged at least 10 can also hold bonds, but in name only until they are 18.
“This is why we suggest that it is often better to set the investment bond up in the name of a parent or grandparent. This means that there will be no penalty tax rates for children under the age of 18 (if they make withdrawals before 10 years) and the parent or grandparent stays in control of the bond and decides how the proceeds are spent.
“It also means that you can start a bond for a child under the age of 10 – which is a good idea if you anticipate a high cost of education.”
Or you can factor education into estate planning
Director at Verante Financial Planning and chair of the SMSF Association’s NSW state chapter, Liam Shorte said parents and grandparents can also consider factoring education funds into their estate plans.
He said: “You can establish a dedicated education fund through a testamentary trust in your will. This is a tax-effective and flexible way to provide for the education of your children or grandchildren. It can also help to ensure that the funds you want to be applied for their education are preserved and not misused by young beneficiaries or caught up in the complications caused by the rise of complicated blended families (his, hers and ours issues).”
A testamentary trust is a trust created within and by a will, and which only comes into effect upon the will-maker’s death. It can only be established using certain assets.
“If you are a grandparent, leaving bequests via a testamentary trust for payment of education fees and related costs for your grandchildren is a more tax effective method of providing for their education rather than leaving additional bequests to their parents that may be caught up in marriage breakdowns, business bankruptcy or litigation,” Mr Shorte explained.
He gave the example of a couple with $1,500,000 who want to make their three grandchildren beneficiaries but are concerned they are not mature enough to use an inheritance responsibly. As such, an education fund would ensure the grandchildren continue their education, but are also provided for in their developing years.
A trust is established that provides that the children will receive 50 per cent of their inheritance each, and provides that it only goes towards education, medical, accommodation, utility and maintenance expenses until they are 25.
Further, should the beneficiary not meet the level of education required by 25, the balance will be distributed among specified charities. However, if the beneficiary achieves the required education, they will receive full control of the trust.
“The education funds will ensure that each child is adequately supported, but also give an incentive to further their education. If all children were from the one family you could use just one trust,” Mr Shorte continued.
“You set the terms of the testamentary trust in your will. These terms can restrict the ability of any of the beneficiaries to control the activities and investments of the trust or give them complete control. You are in effect choosing to ‘rule from the grave’ to ensure that the inherited assets are protected and used sensibly for the benefit of the primary beneficiary.”