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Investing For Children via a bare trust & broker account

TLDR- Open up a Davy Select Minor Account which sets up a bare trust for you and gift money to your children.

Many of us have children and want to invest a little bit for their future, whether that’s to go towards a deposit or help with the cost of university, its something every parent wants to do if they can afford it. The problem is there are limited investment options for children in Ireland.

In the UK they have junior ISAs, premium bonds, high-interest savings accounts and of course Martin Lewis. We don’t have a Martin Lewis in Ireland so there is less information online.

Interest rates in the Eurozone are dire and likely to remain that way for years. If you just save in a regular bank account you are going to be losing money in real terms as inflation will eat away at it.

Annual Gift Allowances

You can gift your child €3000 a year tax-free and this will not count towards the inheritance threshold. For example for one child if you put €3,000 in it each year for 20 years, availing of the small gift exemption, over a period of 20 years that is €60,000 you can gift tax-free and it won’t be counted against the child’s tax-free threshold. If your partner does the same that increases to €120,000. So that is €120,000 that you can pass to that child tax-free

Child Savings accounts

Savings accounts for children typically pay no more than 1% (at the time of writing). This is very low and will not keep up with inflation so your money is guaranteed to lose value in the long run. The plus side is that they are easy to set up with no fees, instant access and are guaranteed to have a higher nominal value when accessing them. It’s what I currently have with my children.

For a small amount, the difference in returns won’t make much difference, especially after fees with the stock market.

The best place to check for child savings rates is Money Guide Ireland.

Prize Bonds

Prize bonds are like Premium Bonds in the UK. You don’t get paid a set amount but its more like a lottery where you get a random win every so often. The expected return is for example is 0.35% but as most people will win nothing, you can win some big money if you get lucky. Find out more here

  • Weekly prize draws with thousands of Tax Free Prizes including a quarterly jackpot prize of €250,000
  • Prizes are paid directly to your bank account or reinvested into new Prize Bonds
  • Register for State Savings Online to view and manage your Prize Bonds online
  • No Fees or Charges
  • No minimum age limits to invest
  • Redeem your investment any time after 90 days directly into your bank account
  • Indefinite holding periods – no expiry or maturity 
  • Buy online or by phone, at your local Post Office, by post or set up a monthly Direct Debit 
  • Invest as little as €25 (4 Prize Bonds) up to maximum €250,000 (40,000 Prize Bonds) per individual
  • Terms and conditions apply

National Savings

You can also invest with the government using regular savings accounts. Find out more here

The current rate is only 0.63% which is almost double the prize bond rate but I actually would prefer the prize bonds as there’s a small chance of winning a huge amount and you are giving up 28 basis points.

  • Based on 12 monthly contributions reinvested for a further 5 years
  • Direct monthly payment of Child Benefit to Childcare Plus
  • No fees, charges or commissions
  • Fixed rate of return
  • Register, view and manage your holdings online with State Savings Online
  • Repayment directly into your bank account
  • Minimum €25 up to maximum €1,000 per month (amounts above maximum €12,000 per annum will be transferred to Childcare Save, a variable interest rate account, subject to DIRT)
  • Automatic annual renewal offer, with the option  to alter the savings amount
  • Access to your initial investment and any interest earned with 7 days notice
  • To benefit from the full return, you must hold the product to maturity. See terms and conditions for details on the returns if you encash early
  • Terms and conditions apply

Invest in the Stockmarket

For large amounts in the long term, the stock market has traditionally been the best place to invest. Whether that is true going forward is an open question. I don’t think it’s a strong argument that over the last 100 years the stock market has returned, 7% real on average, therefore it will revert to the mean. It’s a common argument in the FIRE community and I think it’s totally wrong.

The discussion about the returns from the stock market is very complex and beyond the scope of this blog post but be aware that in 20 years, it’s perfectly possible that your return is less than what you put in depending on the performance of the stock market and fees.

The easy way

The easiest way to invest in the stock market for your children is via a child savings fund via Zurich.

What is Child’s Savings Plus?

Child’s Savings Plus is a regular premium, unit-linked savings plan. It allows you to invest in a range of investment funds at the start of the policy, and once you make your choice of funds, the fund choice applies for the life of the plan.

They basically deal with everything and invest the money in a fund of your choice. If you look at the choice of fund, after 7 years, a lot do return negative in the unfavourable scenarios and some even return negative in the favourable scenarios.

For example, this level 2 (out of 7) risk Global Government Bond (J.P. Morgan) fund returns a negative amount even in the best scenario

There are dozens of funds to choose from. You need to look at the Key Information Document (KID) and find one that meets your risk profile and has the right fee. All funds as far as I can tell are managed and as they sort out the paperwork for you, it’s quite a high charge overall, 1.25% I think.

This is the easiest way to invest in the stock market as far as I can tell. You just sign up and deposit as little as €75 a month.

Can you do better?

Ideally, there would some way to get a regular broker account set up for your child. Degiro once upon a time offered child accounts but stopped. Unfortunately, due to increasing requirements resulting from stricter Customer Due Diligence (CDD) laws and regulations for persons under the age of 18, we have stopped opening accounts for minors in 2018.

Very few other brokers will not open accounts for minors either, I have checked IBKR and Bux Zero.

Fortunately, there is a way around this by using a bare trust. What is a bare trust? A bare trust arises where assets are held by a person or persons (known as trustees) for the benefit of another person or persons (known as beneficiaries). Bare trusts are commonly, though not exclusively, used to hold assets for minors.

Davy Select offers brokering accounts for minors. As a bonus, they set up a bare trust for you. From this thread on allaboutmoney.

Clients of Davy Select can open a Personal Investment Account for each of their children. A bare trust is used to ensure the assets are held for the benefit of the minor but can be controlled by Trustees until the minor reaches the age of 18. At that time the bare trust expires and the account becomes a standard account in the (formerly) minors individual name. A separate account must be set up for each minor. There is no extra charge for this service.

There are no entry/set up fees. There is a quarterly fee of €50 which is offset by the value of any commissions incurred during the quarter i.e. if you traded during the quarter and incurred commission of €20, the quarterly fee would be €30.

The fee might sound expensive but considering it would cost €2000 including VAT to set up, its actually quite cheap. Once you have your Davy Select account, you can buy a range of stocks and funds. Its just like Degiro or IBKR.

What about Tax?

From the same thread on allaboutmoney.

From a minor’s perspective they are taxed at 41% for funds and 33% on gains (same as adults). The guardian would be responsible for completing the return on behalf of the child. For income this is taxed on the parent or grandparent depending where the funds came from. Once the child reaches 18 it is then taxed on the child.

Anti avoidance provisions will tax a minors income as yours but bizarrely capital gains belong to the minor.

So basically, if you invest in funds or stocks that don’t payout dividends, then there will be no tax to pay until they are sold. Obvious examples of stocks to buy would be Warren Buffet’s Berkshire B or Alphabet. There are fees for foreign share dealing though, so if you want to keep fees to a minimum, you could try something like Allianz Technology trust or Baillie Gifford US Growth. They both invest in the USA but you can buy on the London Stock Exchange.

Summary

You can invest in stocks for your children via a bare trust. Davy Select Minor allows you to trade shares on behalf of your child. If you email Account.Opening@davy.ie they will let you know the paperwork you need to fill in. When this information has been received they will generate a trust document. The trust documents require wet ink signatures so these will be sent by post for completion by both trustees and a 3rd party independent witness. They also require a copy of the passport or birth certificate for each minor.

If you want to pass on other assets.

If you have other assets you want to pass on in a tax-efficient way, a family partnership or a different type of trust may be more suitable. Seek professional advice about the options. It will expensive to set up but the tax savings should be worth it.

Disclaimer.

Errors and omissions excepted. Please double-check everything with a professional before committing to anything. If you have spotted an error, please let me know. I will update and credit you. Or in you have any alternative investments for children please get in touch. I don’t know anything about credit unions and the products they offer.

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