Question of Money – Gift Exemption

tax advice

“We have two children, aged seven and nine. We have never set up a bank account for them, but their grandad wants to use the small gift exemption to give them money tax-free. He is going to give each of them €3,000 this year and possibly over the next few years. We do not intend giving the children access to this — it is for future needs. Have you any advice as to what type of account to open? Is a child account with one of the banks the best option? I’ve noticed some have very low upper limits, such as €5,000, which would be no use, but others are higher and they don’t charge fees.”

YQ, Co Kildare

The small gift exemption is a very efficient way for someone to begin distributing their estate tax efficiently. In this scenario, your children could inherit up to €32,500 each from their grandfather on his death. Anything over that would be subject to capital acquisition tax at a rate of 33%.

By putting in place a facility now to take advantage of the small gift exemption of €3,000 per annum, their grandfather achieves two things. He begins to distribute his estate tax-efficiently and he ensures that his grandchildren can benefit from wealth that he has generated without having to wait until he dies.

When financial planners are asked: “Where should we invest?” the question is always reversed, for clarification on the objectives of the investment and the time frame involved. As a rule, if the objectives are within five years of the initial investment, deposit-like products are the safest. These include state savings plans, which can be tax-efficient, and junior savings accounts from banks or credit unions.

Unfortunately, deposit rates are extremely low and the investment will achieve little return in that period; nevertheless, the period is too short for a prudent investment outside such a vehicle.

You mention that your children are seven and nine years old. If the future needs you reference are college or a deposit on a house, the time frame shifts to 10 years or greater. Historically, over such a time frame, equities — and the ingenuity of people to continue to create great companies — have been the best home for investment. Some of the biggest companies in the world today had not started 20 years ago, and that will probably be the same after another 20 years. Investments in this asset class will endure greater volatility than a deposit product, however, and it is important that you are comfortable with this from the outset.

On average, though, investing in a fund that tracks a well-diversified global basket of equities can return in the region of 6% annualised over the period mentioned. All the life companies and financial houses have flexible offerings in this space. As Warren Buffett said: “The stock market remains an exceptionally efficient mechanism for the transfer of wealth from the impatient to the patient.” Identify your goals at the outset, stick to the strategy identified and never react to the markets.

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