Strategy Talk | August 2018
It's all about the kids! Child Maintenance Trusts, helping your grand kids and talking money with teenagers.
We're preparing for the future, in this month's edition of Strategy Talk.
WHAT IS A CHILD MAINTENANCE TRUST
When relationships break down, child maintenance payments are often made from post-tax money. If this is a position you are facing, perhaps you might be interested in learning about a Child Maintenance Trust.
According to the National Centre for Social and Economic Modelling (NATSEM), the cost of raising two children is estimated at $812,000. For those in the 45% tax bracket, every $25,000 in child support costs nearly $50,000.
Just as alarmingly, children receiving payments of ‘unearned’ income, such as support payments can attract tax rates as high as 66%.
When a Child Maintenance Trust (CMT) is established, investment assets placed into the trust generate income toward meeting child maintenance obligations. CMT income is taxed in the child’s hands at adult rates meaning that children receiving benefits from CMTs can claim the tax-free threshold, currently $18,200.
Before a CMT can be set up certain conditions apply including:
a marriage breakdown occurring,
both parents consenting to the trust terms,
the contributing parent must earn in excess of the income tax threshold.
Importantly, trust assets come under the child’s control at a date pre-determined by you, for example, when the child turns 18.
A clear advantage is that CMTs protect assets so should you become bankrupt or lose your job you can continue to meet your child support obligations.
Case study – Tania
When Tania was 13 her parents divorced. Tania lived mainly with her mother and her father’s child maintenance obligation was set at $4,000 per quarter. After seeking financial advice, Tania’s father considered a Child Maintenance Trust. A comparison of Tania’s financial situation was used to determine whether a CMT was appropriate.
If Tania’s father invested a lump sum of $50,000 at 4%pa, regular quarterly drawdowns of $4,000 could be made comprising $500 income and a return of capital (return of capital is tax free).
Taxed at adult rates, the CMT income would fall below the tax-free annual threshold of $18,200 therefore no tax would be payable.
Tania’s father set up a CMT that would vest in her name when she turned 18. If Tania got a part-time job while she received these maintenance payments, her wages would be added to the payments and provided the total did not exceed the annual threshold no tax would be payable.
Outside of a CMT, Tania’s support payments would pay tax at minor rates. As her payments would exceed $1,307 pa, they would be taxed at the flat rate of 47% ($7,520 pa based on income of $16,000 pa).
Wages attract adult rates but would fall beneath the tax-free threshold.
This has been a very brief introduction. It’s worth talking to us about how CMTs might fit into your overall financial strategy as they are not for everyone.
Note: this case study does not consider variations in child support payments or inflation.
A DIFFERENT WAY TO HELP THE GRANDKIDS
Many grandparents want to give their grandchildren a head start in life, and a common way to do so is to help by paying some (or all) of their school fees. This can, of course, simply be done by making a contribution at the time the fees are payable. However, it’s not unusual for grandparents to plan ahead by setting funds aside in a specific account. That is one option, but there might be a better one.
Plan A
Donna and Simon are a typical example. They decide to put $50,000 into a term deposit to help pay the school fees of their granddaughter Ellie when she starts secondary school in 10 years’ time. With an interest rate of 2.6% per annum (pa) and interest paid annually, their initial deposit will grow to $64,631 – a nice boost to Ellie’s future education.
But is there a better way to use that $50,000?
While it’s nice to have a specific account with its special status and easy to see growth, the important thing is the overall pool of money available to the family when the time comes to stump up the school fees.
Plan B
Ellie’s parents, Sara and Shane, are five years into paying off their mortgage. Their interest rate is 5% pa, the remaining balance is $530,000, and their monthly repayments are $3,500. If interest rates and payments remain steady, in 10 years’ time their mortgage balance will be down to around $329,427.
What if, instead of setting up the term deposit, Donna and Simon gift the $50,000 to Sara and Shane who then deposit it in their mortgage account? This sees them effectively servicing a smaller loan. Maintaining their usual monthly repayments will now reduce the amount they owe on their mortgage in 10 years to approximately $247,077, giving them more equity in their home to draw on for school fees.
Difference
Plan A turned $50,000 into $64,631, a net benefit of $14,631. But plan B more than doubled that benefit to $32,350!
Of course, Donna and Simon will need to feel confident that they can trust Sara and Shane to use the gift in the way they intend, and not to redraw it for holidays or other purposes. And if they are receiving any age pension, or intending to apply for one in the next five years, Donna and Simon will also need to be aware of the gifting rules and how this gift could impact their pension payments.
Get advice first
This is just one example of how intergenerational planning can significantly grow the wealth of the extended family unit.
If you’re seeking the most effective way to assist your children and grandchildren financially, talk to us first.
HOW TO TALK MONEY WITH CHILDREN
Courtesy of Money & Life, we are pleased to share the "How to Talk Money with Children" e-book.
"The aim of this eBook is to help you share good financial habits with children, your own, or those you help raise. The truth is children first learn about money and how to manage it - earn, spend, save, invest, give it away - from watching and listening to adults. When we share positive behaviour and are frank about money, we create realisitic expectations for children and we empower them to become financially capable adults. So, why not weave smart money lessons into your everyday moments?"
You can download the e-book here.
JULIE CLIFF: SPACE & TIME
As all parents know, children can be a handful. Simultaneously juggling your kids, work, home and other commitments can make it difficult to find the time to clean, de-clutter and organise your life. That's why we're pleased to introduce a helping hand and a solution to this all too common problem.
"My name is Julie Cliff, Professional Organiser at Space and Time.
I help people get organised at home. I understand that free-time is precious for busy people. I work with them to get jobs done that they can't do on their own in the few spare hours they have each week. I offer an extra set of hands, expert sorting, organising, storage and filing advice to get the job done faster, and a calm voice of motivation to see the job through. Getting the job done frees up time to spend with the family or whatever they choose to do.
My favourite service I offer is “Declutter my home” - which is perfect for families that are working long hours. This service includes pantry organisation, meal planning, toy organisation and storage, wardrobe organisation, paperwork/filing or decluttering for sale or renovations. Getting organised in this way reduces stress and clutter and creates permanent homes for things so your family members, nanny, or cleaner know where to return them.
Declutter my home is also perfect for those dealing with a change of circumstances such as downsizing or the loss of a loved one. I walk with them, helping to decide what to keep and how to find a permanent home for the things they keep in their current home or the next.
For more information please visit spaceandtime.com.au"