Q. My husband and I own our own home, receive sufficient income from investments to provide for a comfortable life style. We travel overseas at least twice a year to visit our family that includes two grandchildren so far- one from each of our adult children.

I was left a legacy of $75,000 from an aunt and I am looking for the best investment to pass onto the family some money to provide tertiary education for the grandchildren, 15 years or so from now. The family live and work  overseas. What options for investment should we consider?

A. First and foremost, you need to make a decision whether you wish to provide a legacy individually or as a pool of capital for all grandchildren. As you note you have 2 grandchildren at present but that may change.  So consider how you would equitably provide for the benefit of all grandchildren now and into the future.

The next consideration is under what ownership structure you would own the assets.  Children are not entitled to own securities or Managed Funds  in their own name until age 18.  Hence  the assets would need to be held in trust by an adult/entity until they attain an agreed age.

A more expensive and more complicated option is to establish your own Family Trust. Ownership of the assets resides with the Family trust and is not time bound by an age unless specified in the Trust Deed.

You need to consider how much control you wish to exert over Grandchildren accessing the funds?  If the children own the asset in their names at 18, it is hard to ensure the funds are used for the purposes intended.

Given that your proposed time frame is long term 15 years +, you should consider the tax consequences of the earnings on the investments on an ongoing basis and potential Capital Gains tax on eventual sale.

With a long investment timeframe, I would suggest looking at growth investments.  For diversification and ongoing management, the simplest way to do this would be via a Managed fund.  A Managed Fund will invest in a range of assets from shares to property and Fixed Interest.  A portfolio can be built to reflect the assets you would prefer to be invested in.

Managed funds can be owned as Investment trusts.  Tax is payable on earnings on the fund by the trustee/custodian at their marginal tax rate as received and liable for Capital Gains tax at the time of redemption.  These are usually recommended for trustees whose taxable income is less than approximately $37,000.

The alternative is to own the Managed funds as an Insurance Bond.  Tax is paid on earning within the fund at 30% and after 10 years the proceeds are tax free on redemption. Usually recommended for trustees with income greater than $37,000 or who want a simpler solution.

Under either scenario, Managed funds can be held in trust on behalf of the children by parents, grandparents or a Family Trust.

Consider the ownership, tax and management cost applicable under each scenario and determine which will best suit you.


Follow Andrew on Twitter @AndrewHeavenFP.  This article was originally published in The Australian.