Many invest for their child’s future by opening minor accounts. That is they invest in the child’s name. Here is why I think this practice is unhealthy and offers no great monetary advantage in most cases.
This post is inspired by a thread on the subject at Facebook group, Asan Ideas for Wealth.
First, let us get the monetary aspects out of the way.
Investing in the child’s name while he/she is a minor (less than 18 years of age) has no tax benefits. Tax on interest income or capital gains will have to paid by the parent as per income clubbing rules.
Many invest in the hope that the tax liability passes onto the child once they turn 18 and not yet started earning.
This makes sense only if the child turns 18 before he/she graduates from school. Most kids finish school before they turn 18. Therefore, a major chunk of the money is likely to be redeemed before they turn 18.
In addition, if one had started investing in equity and debt mutual funds several years prior to school graduation, the tax liability would be minimal and more importantly the same irrespective of who pays the tax.
Either the long-term capital gain is not taxed (equity) or is taxed at a fixed rate with indexation (for debt funds as per current rules!).
Therefore, there is no great advantage in investing in the child’s name.
The tax liability is reduced only if the gain/interest income is taxed as per slab (eg. Fixed deposit), assuming the child starts earning at a lower slab than the parent does.
However, in the case of fixed deposits, tax on interest income is typically (not necessarily!) paid and declared each financial year. Therefore, for the most part of the investment tenure, the parent would be paying the tax.
Of course, anyone who understands the concept of a real return would stay away from fixed deposits.
What about investing in the child’s name for their marriage expenses? Nothing disadvantageous in this case from an operational point of view. Nothing spectacularly advantageous either, for the above reasons.
Why mixing finances? I would like to pay taxes on the gains I make with my money.
Whether we procreate by design or accident, the moment the pregnancy is confirmed, our responsibilities as parents begin. See, How to plan for your child’s education and marriage for more on the subject.
It is our duty to ensure our children pursue their dreams. We should allow them to perceive their calling when young, and fund their calling (either a college degree or seed capital for an enterprise) at the appropriate time.
Therefore, we need to invest enough time, affection, attention, and of course money to make this possible, all the while not ignoring our own retirement plans. A tough balancing act!
While from the parent’s point of view the duty is unconditional, it cannot be so from the point of view of the child.
That is the child can (if not should) expect financial support from parents provided,they have displayed enough evidence that they are worthy of such support.
I think as parents we must make this quite clear to them from an early age.
All well to say “I am interested in pursuing X/Y/Z degree". That interest should be backed by effort, focus and a sense of purpose during school years.
The same goes for those who wish to become an entrepreneur with or without going to college.
If I do not see evidence of effort and a sense of purpose in my children, I will not blindly fund their future.
I did not say that I won’t fund their future, just that I will not do so unconditionally.
By investing for my child’s future in my name, I legally reserve that right over the accumulated corpus.
Trust and love are two different things. I love my son unconditionally. If he turns out be an axe murder, I will do what Mr. Brooks did in the movie, Mr. Brooks (read story here).
Trust in certain matters cannot be unconditional. I will not blindly fund a lazy bum. Especially one who shares my DNA.
Most parents believe that ‘good parenting’ would result in a ‘good’ child who will not disappoint them. Parenting with expectations is beyond naïve.
Also, some believe that investing in the child’s name is a good way of teaching them money management and making them feel responsible. I fail to see any logic such thought processes.
Money management is a skill that must be learnt and honed with practice.
How will investing in a minor account which the child cannot operate independently help in this regard?
Why not keep it simple and invest in our own name?