I am often asked how to create an investment portfolio for a child? What is the best way to do this? Using your own account or a child's account? Create an investment account or just do the 3rd step?
Let's understand:
In Estonia, thanks to the current system of investment accounts, it is possible to defer the payment of taxes on profits from invested money. The question, of course, is whether to open it separately in the name of the child or make yourself a second investment account and at the time of majority or later give him access to money or assets.
Consider the options for action:
- We open an account in the name of the child, create an investment account and buy assets.
If you are doing this, you need to keep in mind several factors. First, if the account is opened in the name of the child, then this is the property of the child, not yours. Accordingly, all transfers must be made by a legal representative, including receipts to the account. That is, according to the principle, they made a transfer to the child's account, bought shares, investment funds and left them lying. Legally, you can't sell anything. Technically, of course, you can do it, but by law you should be able to sell the child's property only by court order.
This means that the parent cannot do anything with the child's money/assets except with court permission if a sale or payment is required. The only concession is that if the parent pays the money himself, but does not sell the assets. Buy and never sell 🙂
Another important limitation is that there are few brokers that offer account opening for children. Our local banks provide such opportunities, but their commissions for transactions are appropriate.
- We create an account for the child and do step 3.
We ourselves actively advertise the third pension pillar as a simple and reliable investment solution, but there are several serious BUTs here!
Firstly, this is again the personal property of a person, which means that no one except the owner can use or change it. In other words, if I, as a parent, thought that I would like to do the third pillar for my newborn, and choose fund A, where the monthly payments go, but fund A turns out to be bad, then I have to wait until the child reaches 18 years of age to receive fund transfer to a better fund. The only other thing I can do is start raising new money for a better fund and hope that A's fund gets better after all.
Secondly, the sweetest part of the third pillar is lost for the child - income tax refund. The child has no income, so he has nothing to return. Therefore, it makes no sense to make a 3rd pension pillar for a child.
- We create an additional investment account on our behalf
In this way, we remove all restrictions from ourselves and can buy and sell assets as our darling wants. At the same time, we can have 2 or more investment accounts for several children, but it is important to take into account that at some point the money will still need to be transferred somehow. They saved up for the child :). It is possible to make a “donation” without tax payments - a transfer to a child, but the problem will arise that at one fine moment it will be necessary to pay taxes on transactions. This means that you will need to sell all assets and send money to your beloved child by transfer, while paying all taxes for the realized profit.
- We create a separate company where we are the owner of the company
Here it will be necessary to take into account the costs of maintaining the company, the services of an accountant, the LEI code, but on the other hand, it will be possible to make any transactions without hindrance and there will be no need to pay tax on realized profits if the money remains inside the company. Especially in this format, I like the fact that you can not transfer money to your beloved child immediately upon reaching the age of 18, but gradually give parts of the company for any merits, motivating him to achieve more, so that at one fine moment he becomes a full-fledged or 100% owner of the company with incredibly large capital 🙂
If you liked it - like and feedback from you. And you can also ask questions. I answer them in the comments 🙂