How to build a meaningful financial legacy for your grandchildren in 2025

As you make your New Year’s Resolutions for 2025, you may be considering ways to do something truly special for the grandkids.

How about a small investment portfolio for the little-ones that could be worth serious money in the future and hopefully, whet their investment appetites in the future?

It might be a selection of blue-chip shares or easier still, a bundle of shares packaged up as an exchange traded fund (ETF).

While it’s not for everyone, there’s plenty of seniors who are in the fortunate financial position where at this stage in life, the money’s not really needed.

Passing it on to your descendants now, also gives you the joy of seeing them benefit from the gift. All while you’re still around.

There’s a few simple rules to follow which deal with a few legal issues.

A child under the age of 18, can’t legally open, own or operate an investment like a share portfolio or ETF.

That can easily be managed by an adult establishing a form of trust, sometimes referred to as a “bare-trust”.

A bare-trust requires two players.

Player one is the trustee and makes decisions on behalf of player two, the beneficiary.

In a practical sense, the trustee needs to be someone likely to see the trust through to it’s conclusion, usually when the child reaches 18 years of age.

While grandma and grandad might be making the gift, It might be more pragmatic appointing a parent of the child as the trustee.

That deals with the possibility of the trustee passing away before the beneficiary gets to access the funds.

While lawyers might be licking their lips at this stage, there’s no real legal requirement to document everything in a formal “trust deed”. At the very least however, you should identify the name of the child in the account name.

That connects nicely with the most common query regarding bare trusts.

What are tax implications of a trust for both the trustee and the beneficiary ?

Provided the actions of the trustee only benefit the beneficiary over the life of the trust, the arrangement will be accepted by the ATO.

The bottom line is that the proof of the trust arrangement lies in the actions of the trustee.

Proof might start with the name of the account. Most online brokers include an option to indicate the bare trust arrangement when the account is opened. You can then enter the beneficiary’s name, which will usually be the name of the child.

You will be asked to provide a Tax File Number which is often the trustee’s but a guardian can also obtain a tax file number for an Australian child.

In this case, the TFN attached to the investment account could be the child’s TFN. This is a paper-based application which is easily lodged at an Australia Post office. You can decide to provide the TFN after the account is open.

Next, ensure the trustee derives no benefit from the investment. That means dividends are paid into a bank account in the name of the beneficiary or, better still, reinvested back into shares or additional units if using an ETF.

Under Australian tax law, minors can only earn $416 tax free from non-employment income. They then cop income tax at 66 per cent until earnings exceed $1308. Above that level, tax is paid at the top marginal rate of 45 per cent.

This is to dissuade people from directing income through children to avoid paying tax.

Nonetheless, in a trust situation that invests in companies or funds that distribute franking tax credits, those credits can reduce the tax liability and can even be refunded to the child’s bank account.

The real benefit of the trust arrangement is that when the child reaches 18, the investments can be transferred to the now adult beneficiary, without triggering a capital gains tax event.

When the beneficiary decides to sell the investment, perhaps to fund a deposit on their first home, they pay tax as though they were the original investor, acquiring the original buy-price and date.

These days it is possible to kick off a share-trading account for as little as $500 with online share broking houses like Commsec.

Hong Kong based broker MooMoo has no minimum amount as do a number of other online based overseas brokers.

Brokerage can be as little as $3 per trade meaning even smaller accounts are practical and all brokers operating in Australia must hold an Australian Financial Services license. That provides some protection should things go wrong.