Saving for a child's university education; two experts offer their view on how to invest a lump sum gift from grandad

Saving for a child's university education; two experts offer their view on how to invest a lump sum gift from grandad

By Amanda Morrall

We had a question from a reader who was looking for some guidance about how best to invest some money given to him for the purposes of his children's education.

It went something like this:

"My father has given me quite a large sum of money for the future education needs or our children, 11 and 13. He's expecting me to invest it and make it grow while paying for on-going costs. How should I set this up?"

I decided to put the question to authorised financial advisers James Smith of Bradley Nuttall Ltd in Christchurch and Liz Koh of Money Max in Wellington.

Without knowing just how large that donation was, they shared with me a few considerations for the reader.

Smith suggests the first step is to determine the anticipated cash flow requirements "as far as they are able to predict them: that is, from what dates is the income required, how much and how long?"

Next, he recommends plugging those numbers into a spread sheet, together with the starting funds in order to see  the “time horizon”

"Then you need to think about the required return”, he said "that is, what returns do they need from the initial investment to meet the anticipated withdrawals.''

As part of this process, Smith says the reader will need to take into account their capacity to accept risk which if the required return is low, the capacity to accept risk is high. If the grandparenting is further willing to contribute additional sums, should the need arise, the capacity to accept risk increases.

Along with capacity for risk, Smith said it was equally important to look at "willingness to bear risk.'' In this case, the willing party needed to be determined.

"I’m not sure whose willingness is most appropriate to measure, but probably the person who has to 'wear the results' – this could be the children as they would have to incur the debt if the funds fell short, or the grandparent if they are going to stump up more cash."

With the above pieces in place, an investment strategy can then be plotted.

Given the children's expected timeframe for commencing teritiary, Smith said an equities exposure of between 20-30% was likely. A more accurate allocation would be determined having sorted out the variables above.

"The longer the timeframe, the higher the required return, willingness or capacity to accept risk, the greater the allocation to equities."

"In terms of how the funds are owned these could be placed in a Trust, which opens up the ability of the Trustees to assign income to the children. If they are over the age of 16 the income will then be taxed at their marginal rates – so there could be some tax planning opportunities if the funds are held in the Trust.

However, there will be additional complexities with owning the assets in a Trust. They should discuss these with their lawyer or financial adviser that has an overall understanding of their estate plans and the family dynamics.

Another view

Liz Koh, with Money Max, agrees one of the most important considerations when setting up an investment portfolio is time frame.

"In this case, funds will be required within the next 5-10 years; barely long enough to be considered long term given current economic conditions,'' said Koh, recommending a diversified portfolio with a weighting of 60% in income assets (cash and fixed interest) and 40% in growth assets (property and shares).

Such a split would provide some balance between security and growth.

While the money was earmarked for a university education, Koh said another option might be to invest for a longer period to build up a deposit for a house. She said the interest-free nature of student loans meant that it made good financial sense for the two children to take out student loans rather than cash up investments which are earning a return. The portfolio could be of greater benefit if instead it was used to provide a deposit for the purchase of a first home for each child.''

In terms of whose name the investment porfolio should be placed under, Koh suggested seeking legal advice.

"It could be held by the children’s father in trust for the children, or owned by a trust of which the children are beneficiaries.''

Another consideration and argument for using a trust was a possible future claim (Under the Property Relationship Act) but a future partner of one of the children in adulthood.

"Formation of a trust may be helpful in this regard.''

A further benefit of using a trust would be allowing trustees to control the distribution of funds and to ensure they are used wisely and equitably. Also, as trusts are taxed differently than individuals it might create some efficiencies there.

Overall, the costs of establishing and maintaining the trust will need to be weighed up against the potential benefits.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Send 'em to a charter school for starters anyway.Encourage them to study relevant disciplines and not get involved in nutty student union politics unless you want them to end up at parliament

Cashflow > Capital Gains.  The rich don't get richer by investing for capital gains, thats for the financially illiterate. 

Here's a simple example, if you want to buy a house.  Buy a rental property that is cashflow positive, ie one where the rent more then covers the mortgage. 

Of course a financial advisor is going to say buy stocks or bonds, they get paid for the fees regardless of performance.  Bonds netting yields lower then inflation are HIGH RISK.  Growth stocks, have little or no cashflow, HIGH RISK.

The interest free students loans are the best option IMO, use the money today to invest in quality assets, that are cashflow positive and immune to inflation.

Happy New Year. We just looked in to saving for education for a newborn. ASG (Australian Savins Group) have a good scheme where you pay into a fund and it pays out when the child reaches high school. Payments to the student massively increase if they continue to University or similar (if they don't, those extra payments go back into the pool for the others). It seems to be a well managed fund and benefits from an Australian tax law for education savings that we don't have in NZ. We didn't go with it because it didn't quite meet our needs but are instead putting the money into CD's for private high school costs.

I am sure many people here are against this idea but one of my family member did this for their two sons: 

They bought two 2br units side by side with 20% deposit - 20 years mortgage when the eldest one was 6mth old, the rental incomes vs outgoings was neutral.  When their two sons were at uni, they used the rental income as their uni fees.  Now both of their sons are working and living in the units, both are paying rents to their parents towards their retirement funds

They did some analysis on scheme such as ASF but their rental scheme was the simplest and less risky!

+1 from me moa.  Investing for cashflow is smart.

Common strategy in the past, a little difficult to do today for similar young parents to make rental/outgoings cost neutral.

Save a bigger deposit, or buy a cheaper house, do both.

I would agree its pretty hard if you spend every dollar you earn, buy the most expensive place you can, with as small a deposit as possible.  That seems to be the culture of today, with the limitless faith that capital gains will somehow mean something other then inflation.

I don't often look at rental properties but I have seen a few that would be positive with 5% deposit, and many more with a 20% deposit.  I don't live in Auckland though.

The first thing I'd ask is whether the parents have any debt of their own. 

Say for example, the parents have a hire purchase on a vehicle, or say a large outstanding credit card debt... the interest rates they would be paying to the finance company(s) would be astronomical... better than the kids could get from any investment vehicle these days (even if mum and dad pay a few basis points under the going rate)!

If so, why not 'borrow' instead from the kids - as they'll definitely make better interest than they would in the bank or from a managed fund, and when the kids come of age to need to principle as well.. chances are mum and dad will be good for it.







I'm in one retail investment product that is currently returning (over the three months i've been in it) 16%pa after tax and fees. If you are paying more than that in interest you have a bad credit rating or no money sense at all. Credit is cheap and easy, get a credit card, pay off the HP, then do a balance transfer at 2 or3% for 6 months, rinse and repeat.

Amusingly you have replied to a comment that is almost six years old. Skudiv seems different and more wordy in this thread.

How the heck did that happen.. hmm. odd.

Ahh, i see, the spammer posted at the bottom of the thread and i've scrolled up and not noticed the date.

If I am reading things correctly, the brief is to use the lump sum to fund childrens' education.  I would see this as a reason to invest in a very low risk environment.  

Importantly, I would want to know  what the grandfather's attitude to risk is.   Where does *he* think the money should be invested?   Good returns from managed funds are possible - but are by no means guaranteed.   If the grandfather is not looking to underwrite the potential investment risk, then I think there is no room for any investment risk here.

   IiiiII    It sounds like a one-off, once-only donation and it is not necessarily money to fund the entire cost of the children's education.  

Another game-changer is the current status of the relationship between both parents.  No matter what, professional legal advice should be taken in light of this large donation and the cost of that advice should be met by the donation lump sum.     If a legal professional gives compelling reasons to set up a trust, then that would be the only time I would set one up voluntarily.   A trust fund is not the cure-all that many people think they are - they can be a costly and complex nightmare.

I think it is important for this money to be accessible and not locked away - because future education costs aren't  predictable.   If a child shows exceptional ability in (say) ballet or sport , then I am sure the spirit of the donation will allow funding for additional lessons or overseas trips to develop this pursuit.   Conversely, they may need special tuition if they struggle - they might move to a new school - or a new country - develop an illness - you just can't tell what is going to happen.

So don't lock any money away for years -  the usual long-term savings principles don't apply here.  This money - all of it - may be needed.  

The fact that the grandfather has given the money to his son in quite a relaxed way (and hasn't set up a strict rules in a controlled trust fund for the children) tells me that he has (human) trust in his son to do the right thing with the money.   For that reason the account should be in the son's name.      

A cash PIE or term PIE account(s) would be worth considering.   If this was set up outside of the household's main bank account, this would also reduce the temptation to zap money between accounts on impulse, on the internet.    Withdrawing should be a bit of a palaver  but not impossible (i.e. make it that you have to withdraw money in person at a bank/post shop).   

Amanda, these monocolour answers from advisors are BORING.  Whats your time frame?  Do you want high risk or low risk?  How much return do you need?   Blah blah blah!  I want a high chance of making heaps of money, and a near zero chance of losing any money!  I want to do it this year, next year, and every-year all the time!  I don't want to lose any money, what the hell am I paying fees for, if you are going to lose my money? 

How about asking some REAL people who have made REAL money how they did it?  Whenever I meet someone with heaps of money I ask them how they got it.  You will get some pretty interesting stories, many start with "I saw this house for $4,000" but many others wont.

Here are so alternative ideas to the thought-less handing over money to the rich. 

  • Buy a gold dredge, (they retain their value really well if you look after them) and take the family gold mining on the weekends.  Friends of mine make 20k a year, doing it as a hobby.  The family learns teamwork, business skills, work, commodities etc.
  • Plant some Ginko trees.
  • Buy a ride on mower and start a lawnmowing business
  • Take a holiday in Bali, buy a whole pile of crap, and sell it at a garage sale for 1000% markup
  • Buy a breeding pair of dogs, emu's, ostriches,  cows.....

If you talk to enough people, you'll find heaps of great ways to invest money, with HIGH chances of HIGH returns, and low chance of losing money. 

You could even do a segment once a week, "Real people making Real money."

There is so much opportunity in the world, people are severly lacking any financial education, this allows the rich to take their money. 

Skudiv, you're so right.   But to get a true picture, speak to: 

a) people that have made heaps of money, and 

b) people who have lost heaps of money.

The ones in the a) category are generally more than happy to talk long into the night.   The ones in the b) category tend to be as quiet as a mouse and change the subject.

Also, to avoid being boring, I resolve to having occasional words entirely in CAPITALS.  It's the only way to go.  It makes any blog post all the more credible, just like THAT (see?).

"How about asking some REAL people who have made REAL money how they did it?"

LOL.. on not a chance!. These are regarded as one off flukes.. not 'gutsy' people making/taking well researched and calculated risks.....thats not how you trap people, no thats what the NZX is setup for!....other than that agreed.

Heres an entreprenuer making cash for promises.

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We are a group of dedicated animal lovers, and atheists. Each Eternal Earth-Bound Pet representative is a confirmed atheist, and as such will still be here on Earth after you've received your reward. Our network of animal activists are committed to step in when you step up to Jesus. 


.... compared to the antics of the Christchurch City Council , the Eternal Earth-Bound Pets group appears to be quite sane .......

Not so long ago I saw a grafitti at Wellington railway station, it said "Jesus saved"  Then someone added "he shops at Countdown" 

just a thought Countdown is part of Woolworths so I think he's Australian...

So why pay for their education at all, let them take out a student loan and learn the hard way how the baby boomers have lived it up in advance on their future labour and resources.

Some good advice would be to not let the money become the focus of their education. Money is way overrated when it comes to bring up kids.

The question about how long it will be before your kids start attending - Buy Assignment online college is also relevant to another important question - how much it might cost to send a child to college at some point in the future. The cost of a college education has been rising at a rate greater than incomes and inflation for several years - a reasonable estimate of the cost of a 4-year public university degree in 8 years would be somewhere near $100,000 - but in 15 years, that same education might well cost $170,000 or more.

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