Investing money for children
Friends,
As I would like to invest something for the future for my three-year-old godson in addition to material gifts, I have looked into the alternatives.
Disclaimer I: I'm not a tax consultant, I googled my knowledge together and used sample calculations etc. based on my own knowledge - so please feel free to challenge me
Disclaimer II: After I have finished my research, I have the Post from @freakyfinance
saw . who had already looked at the whole thing in a similar form a year ago (thanks for that). However, there is a different focus there in part, so be sure to read it as well.
Tdlr: Optimal tax savings with a custody account in the child's name, but with very high amounts there may be problems with health insurance and BAfÖG. If the custody account is invested in the parents' name, you forgo the tax savings, but have fewer problems with health insurance and BAföG & can give away up to EUR 400,000 per child tax-free. As a "third" person, this is generally difficult - it is better to talk to the parents in advance. If a custody account is invested in a child, then profits should be realized and reinvested in order to minimize the tax burden.
Alternative 1: Custody account investment in own name
A separate custody account is set up with a broker in your own name, into which you can then pay and invest as you wish. After a certain cut-off date, the custody account can then be transferred/given as a gift. However, gift tax is then also payable by the recipient, as this is a third party - according to the law - and applies even to very small amounts (from EUR 20,000). In addition, since you formally have your own securities account, you are also subject to your own taxation; if the saver's lump sum has already been used up, the tax gnaws at the longed-for compound interest for the godchild.
The disadvantages clearly outweigh the advantages:
- Gift tax (from EUR 20,000)
- Capital gains tax (if exhausted)
- The custody account only belongs to the recipient after the gift has been made
- If other people wish to make a contribution, they must rely on the goodwill of the custody account holder.
Alternative 2: Parents set up a custody account for the child
In this case, the custody account belongs to the child for legal and tax purposes, and the parents manage it in trust until the child reaches the age of 18. In addition to the saver's lump sum (EUR 1,000), the basic tax-free allowance (EUR 11,604 in 2024) also benefits here, as the child does not yet have any taxable income. In this respect, up to EUR 11,604 of tax-free investment income could be generated per year. A non-assessment certificate must be applied for from the tax office every 3 years. However, the deposit assets are also taken into account when applying for BAföG at a later date; in this case, the entitlement does not apply from assets of EUR 15,000. Furthermore, as soon as the child's annual income (including capital income) exceeds EUR 5,820 (EUR 485 per month), it is no longer covered by the parents' health insurance. Additional information for high performers: a child costs around EUR 110 - 150 per month in private health insurance.
Advantages:
- Tax-saving effect (and therefore faster asset accumulation)
- Custody account belongs directly to child and can therefore be part of financial education
- One face to the customer: one custody account that everyone can transfer to
Disadvantages:
- Parents must have a certain level of financial education
- Complexity: BAföG, family insurance...e.g. mini-job on the side more difficult if higher capital income is already achieved (health insurance company may cancel co-insurance)
Alternative 3: Parents' custody account investment
Similar to 1, except that the parents have set up an additional custody account in their name for the child (it is generally advisable to set up a separate custody account to ensure clear separation). Friends and relatives can then pay into this account and the parents then invest it. The custody account is then transferred on a certain date, whereby - due to the close relationship - up to EUR 400,000 can be gifted tax-free. The disadvantage is that the child's tax-free allowances are not used; however, there is no need to worry about the child being excluded from health insurance due to the high capital income. It can also be advantageous for BAfÖG, as it is not the parents' assets but their income (including capital income) that is taken into account.
Advantages:
- Simplicity
- One custody account that everyone can transfer to
- Tax-free gift of up to EUR 400,000
Disadvantages:
- Parents must have a certain level of financial education
- Capital gains tax (if used up by themselves)
- The custody account only belongs to the recipient after the gift has been made
Where to open the junior custody account:
Finanzfluss recently published a Video in which the best junior custody account providers were presented. The current results of the comparison can be found >hier< to be found. The winners here are currently ING - in particular due to the free ETF savings plan and the minimum savings rate and finvesto, the latter probably due to the affiliate program ;) - Fun, here the costs for the one-off investment are probably particularly low, which could be particularly interesting for taking advantage of tax benefits (keyword profit realization and reinvest), but more on this in the later numerical example. Since I personally don't know finvesto, I would open the custody account with ING.
Numerical example I:
Now that we have decided to invest something for our little ones, we need to optimize the whole thing again within the constructs. To make the various options more tangible, I have brought along a few numerical examples:
The following sample calculation is based on the following meta-premises:
- Investment period: 18 years (securities account will be closed when you reach the age of majority)
- Investment amount p.a: EUR 3,000 (child benefit 2023 x 12)
- Base interest rate for advance lump sum calculation: 2.55% (base 2023)
- Investment construct: ACWI ETF ($ISAC & $VWRL ), equity allocation: > 51 %
- Tax exemption for advance lump sum calculation: 30%
- Yield forecast: accumulating ETF = 7 %, distributing = 5 % + 2 % dividend
- Tax rate: 26.375 % (capital gains tax + solidarity surcharge)
Option 1:
Depot to child invested & accumulating ETF / results:
- Deposits: EUR 54,000
- Deposit value: EUR 105,567
- Settled via advance lump sum: EUR 12,668
- Taxable profit on sale: EUR 38,899
- Taxes: EUR 10,260
- Amount paid out: EUR 95,307
Option 2:
Deposit to parents invested & accumulating ETF / results:
- Deposits: EUR 54,000
- Deposit value: EUR 100,914
- Settled via advance lump sum: EUR 12,309
- Taxable profit on sale: EUR 34,605
- Taxes: EUR 9,127
- Amount paid out: EUR 91,787
Option 3:
Deposit to child invested & distributing ETF / results:
- Deposits: EUR 68,105 (reinvestment of the dividend)
- Deposit value: EUR 104,642
- Settled via advance lump sum: EUR 0 (if dividend > advance lump sum = 0)
- Taxable profit on sale: EUR 36,537
- Taxes: EUR 9,637
- Amount paid out: EUR 95,005
Option 4:
Deposit to child invested & accumulating ETF. Profits are realized and reinvested at the end of each year in order to make greater use of the tax-free allowance (trading fee EUR 10 p.a.) / Results:
- Deposits: EUR 105,237 (reinvestment of profits)
- Deposit value: EUR 105,237
- Settled via advance lump sum: EUR 0 (if book profits > advance lump sum = 0)
- Taxable profit on sale: EUR 0
- Taxes: EUR 0
- Amount paid out: EUR 105,237
Conclusion:
As expected, the parent deposit option is the worst, but the discount is smaller than I would have expected. Here you have to assess for yourself whether the insurance against the risk that your child will blow the money on your head at 18 is worth EUR 4,000 - 14,000. Options 1 & 2 are not much different, mainly due to the current base interest rate of 2.55%, which is included in the upfront lump sum calculation at 70%, resulting in a similar tax rate to a 2% dividend ETF. The lower the prime rate, the better the option of the distributing ETF in direct comparison. Option 4 generates the most effort, as profits have to be realized once a year, but this is well remunerated. If this strategy is chosen, it is important to opt for a custody account with low one-off investment fees.
Numerical example II:
Here, the custody accounts are held until the end of the 35th year of life and then liquidated, e.g. for a house purchase. The assumptions as above apply, with the following adjustments:
- Investment period: 36 years
- Investment amount until the end of 20: EUR 3,000 p.a.
- Investment amount 21-25: EUR 0 (studies)
- Investment amount 26-36: EUR 6,000 p.a. (work & increase in savings rate)
- From 26, you start working and therefore no longer have a basic tax-free allowance.
Option 1:
Deposit to child invested & accumulating ETF / results:
- Deposits: EUR 123,000
- Deposit value: EUR 453,632
- Settled via advance lump sum: EUR 86,334
- Taxable profit on sale: EUR 244,298
- Taxes: EUR 64,434
- Amount paid out: EUR 389,198
Option 2:
Deposit to parents invested & accumulating ETF / results:
- Deposits: EUR 123,000
- Deposit value: EUR 428,196
- Settled via advance lump sum: EUR 81,539
- Taxable profit on sale: EUR 223,658
- Taxes: EUR 58,990
- Amount paid out: EUR 369,207
Option 3:
Deposit to child invested & distributing ETF / results:
- Deposits: EUR 218,735 (reinvestment of the dividend)
- Deposit value: EUR 447,238
- Settled via advance lump sum: EUR 0 (if dividend > advance lump sum = 0)
- Taxable profit on sale: EUR 228,503
- Taxes: EUR 60,268
- Amount paid out: EUR 386,970
Option 4:
Deposit to child invested & accumulating ETF. Profits are realized at the end of each year and reinvested in order to make greater use of the tax-free allowance (trading fee EUR 10 p.a.) until the start of working life (26), thereafter no more profit realization per year. / Results:
- Deposits: EUR 254,718 (reinvestment of profits until 26)
- Deposit value: EUR 468,841
- Settled via advance lump sum: EUR 54,066 (years 26 to 36)
- Taxable profit on sale: EUR 160,057
- Taxes: EUR 42,215
- Amount paid out: EUR 426,626
Conclusion:
The parental custody account option is more painful here, with reductions of EUR 20,000 to EUR 57,000 compared to the other options. The clear winner here is the tax-optimized investment (option 4). The differences between options 1 & 3 are negligible and can swing in one direction or the other if the base interest rate changes.
Special case: transferring a parental custody account to a child:
Of course, you could now come up with the idea of simply giving your own assets to the child at birth and then letting them grow tax-free so that you can use them again later. Especially as EUR 400,000 per parent can be transferred to the child. However, this entails a number of risks, including the fact that a gift from the child to the parents is only possible up to EUR 20,000 per parent. The gift from child to parent would therefore overcompensate for the tax burden saved, making it a loss-making transaction. There may be other options such as buying a property etc. but that would be going too far & I am not a tax expert.
#juniordepot
#etfs
#vorabpauschale
#dividende
#steuer
