My extended family is, well, extending. I am now of an age that my older brothers and sisters are becoming grandparents and a whole new set of financial responsibilities are being assumed by the young parents – their children.
Unfortunately, like so many other 24-35 year olds, these new mums and dads are carrying a burden of debt that we never did at their ages: huge mortgages, personal loans and credit card debt.
Nevertheless, every parent wants the best for their baby – good health, happiness and financial security.
One – older – friend of mine, an older parent with five children ranging now from age 13 to 23 kept his priorities simple and steady: “The only thing every parent should give to their child, after lots of love of course, is a good education and good teeth.”
Meanwhile, other friends whose children are only now moving to secondary school, in addition to the education and teeth, when buying two investment properties five years ago, thought they were doing the right thing.
Like so many across the country in that time, they believed that in addition to their family home, these two homes would be their legacy to their children.
Perhaps – if they hadn’t borrowed so much money – about €400,000 – to fund the two rather ordinary apartments.
Now in negative equity, they should have just stuck with the orthodontic bills and private school fees (alas, neither of which they can afford today either).
Every family, and every parent is different, but the following is as good a list of suggestions as any on how you can give your own children a good financial head start in life.
It isn’t so much about your children, of course, but about what you can do to protect their interests should anything happen to you, as well as pass on good money habits that will let them become financially independent:
* Write a will: Name your spouse as sole beneficiary (keep it simple when the children are young) and make sure to name guardians for the children. If your combined estate is very large, consider a discretionary trust in the event that you both die. The trust I have in place lasts until my son is 25 to try and avoid what financial advisors call the ‘porsche syndrome’.
* Ensure you and your spouse have adequate term life insurance and income protection and/or serious illness cover in place until the children complete their education. Check the latest www.itsyourmoney.ie life insurance cost survey from the Financial Regulator. A good advisor can also help you determine how much you need or can afford.
* Don’t spend more than you earn. Live within your means. Try to borrow only for asset purchases – a house, your own education/retraining.
* Be a regular saver – for your child. Tax-free An Post savings certs and bonds are ideal because children cannot reclaim DIRT tax (or dividends). The five-year fixed rate Childcare Plus account is designed for child allowance and pays 20 per cent interest at the end of the five years.) Low cost ETFs are ideal investment options. Again, a good advisor can help you decide what investment assets to choose.
* If this were the UK, you would be able to set up a private pension for a baby, and claim the tax relief. But here, parents, grandparents, godparents or others can at least gift a child €3,000 per annum with no requirement to pay or even declare the gift. If it is earning a tax-free return this is a good start towards a college fund, but ideally, you want to find a higher return for such a long period.
While it is unlikely that a baby or young child is going to be the subject of much longer term financial planning, now may be a good time for older, well-off parents to endow a child (either a minor, in trust or an adult child) with the transfer of title of a property.
The collapse of house prices, but the raising of the Capital Gains Tax over the last 18 months from 20 to 25 per cent and the lowering of the Capital Acquisition Tax threshold by over €100,000 means that now might be a good time to undertake such a transfer before the tax position becomes even more unfavourable.
A child can be gifted, tax-free, up to €414,779 before the 25 per cent CAT on the balance must be paid (The parent will have to pay capital gains tax on any gain unless it is their principal private residence.)
Meanwhile a property that a parent continuously shared with the child for at least three years can also be inherited entirely tax free by the child under CAT regulations. (The child cannot already own or partly own any other property and must not sell it for another six years.)
Finally, no parent should feel obliged to leave their adult children an inheritance, especially if their own retirement is at stake.
Instead, the best financial gift you can give your child is the one you sowed when they were growing up: that there is a huge difference between money earned, spent wisely and saved, and money borrowed and wasted.
Ultimately, it is the difference between freedom and enslavement.
* MoneyTimes readers can buy Jill’s latest TAB Guide to Money Pensions and Tax 2010 this month by ordering copies at www.jillkerby.ie at a special reader’s price of just €10.