Do you want to set up a trust account for your children? Here’s what you need to do.
By opening a trust account for a loved one you can enable them to pay for their education, their wedding, or even give them the head start they need to put a deposit on a house.But what is a trust account and what do you need to know before you open one? Let’s take a closer look.
Savings accounts you can open in trust for your children
What’s the difference between a trust account and a trust fund?
When some people hear the words “trust account” they immediately think of a trust “fund”, which is actually a completely different thing. A trust account is a bank account that you open for your child; however, rather than opening the account in your child’s name, you retain ownership of the account. A parent or grandparent can be the trustee for the child’s account, but once the child turns 18, control of the funds in the account will pass to them.
Meanwhile, a trust fund is a legal arrangement in which the ownership of a person’s assets (not just cash but shares, bonds, property and even antiques) is transferred to a family trust and managed by trustees for the benefit of others. Any person who receives cash, property or other assets from the trust is known as a beneficiary.
Family trusts are usually only considered as an option for managing a child’s future finances when you have substantial assets to invest. Once the child reaches a certain age, for example 18 or 21, they can access the assets in the trust fund.
Looking for a kids bank account instead?
If you're looking to give your children a good financial start, it's might be worth looking into a kids bank account. Take a look at our Kids Banking Hub to find out more.
What type of trust account?
There are two types of accounts you should consider when opening a trust account for a child: a savings account and a term deposit. High-interest online savings accounts offer some of the best interest rates around, allowing you to grow your balance as quickly as possible. Some even allow you to earn bonus interest if you satisfy specific conditions, such as depositing a minimum amount into the account each month.
Meanwhile, term deposits provide the security and consistency of guaranteed returns. These accounts let you lock in a fixed interest rate for a prearranged time period, for example one or two years. This means you will not be affected by any interest rate drops that occur, but you won’t be able to enjoy the benefits of any rate rises being applied to your deposit.
How to open a trust account
Banks, building societies and credit unions around Australia offer a variety of savings accounts that you can open in trust for your child. There are typically three ways you can apply to open an account in trust:
- Online
- Over the phone
- In person at a branch
However, you will most likely need to visit a branch to provide ID for your child (you won’t need to verify your identity if you’re an existing customer, but you will need ID if you’re opening an account with a new bank). You may need your child’s birth certificate and other forms of acceptable ID, for example a Medicare card or school attendance letter. The documentation requirements vary between banks, so it’s a good idea to phone ahead and confirm what paperwork you need to bring.
Finally, you will need to provide your Tax File Number (TFN) when you open an account. Read on for information about why this is important.
How and when do the funds transfer to my beneficiary?
If you open a bank account in trust for your child, you will need to pass control of the account to the child when they turn 18. This will be an automatic process, and your bank will outline the terms and conditions when you open the account.
Depending on the terms and conditions of the account, you may also be able to hand control over to your child before they reach 18 years of age. However, some bank accounts can only be held by people who are at least 18 years of age, so check these requirements with your bank.
Are there any tax implications to consider?
The ATO has strict rules concerning children’s savings accounts and there are several important tax issues to consider if the account you hold in trust for your child earns interest income. Regardless of who holds the account or what type of bank account it is, the person who declares the interest is determined by who provides and uses the funds.
If you provide the money and spend it however you like, you will need to declare the interest on your income tax return. This means you will need to quote your TFN when you open the account or, if a formal trust structure is in place, quote the trust’s TFN.
This is different to the tax rules that apply to interest that children under 16 earn on savings accounts. If a child provides money into a savings account and decides how it is spent, taxes will apply if they earn more than $420 interest per year.
If you’re at all confused about the taxation rules concerning trust accounts, ask your accountant or financial adviser for assistance.
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Help your kids earn a little extra pocket money
Not just for children’s savings
Providing for a child or grandchild’s financial future is not the only reason why you might open a trust account. For example, if you and your family members join forces to purchase an investment property through a trust, you’ll need to set up an account where the funds belonging to that trust can be held.
If you’re a solicitor, real estate agent or accountant, you might consider operating trust accounts into which clients pay their funds. If you’re the trustee for a parent’s estate following their death, the finances they leave behind will be paid into a trust account until they can be properly distributed to the relevant beneficiaries.
While this article deals with opening a trust account for a child or grandchild, keep in mind that different circumstances and features will apply to different types of trust accounts.
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We live in the UK and would like to open a “Trust Account” for our granddaughter in Australia, with us as trustees. Is this possible?
Hi Tom,
Thanks for your inquiry
Opening a bank account with an Australian bank is a simple process given that you’reyou have plans to move or stay in Australia in the future. If you reside in another country and don’t intend to migrate to Australia, you’ll need to speak to a local bank who has international ties with a bank in Australia. Those on a tourist or visitor visa can open an Australian bank account by visiting a local branch and providing your passport.
Hope this information helps
Cheers,
Arnold
If a child is under the age of 5 has a trust account that contains over $100,000, will the low income parent incur the tax from the interest?
Also is the government guarantee capped on the child’s or the trustee’s name?
Hi Toni,
Yes, the tax will apply to the trust account of a child if you are the trustee who provides money and uses it. In this case, you would need to provide your TFN or quote your trust’s TFN. I would suggest that you seek out professional advice on tax from an accountant or financial adviser who will consider your personal circumstance.
As for your second question, the government guarantee would apply to the owner of the account. Basically, the guarantee is $250,000 per person and per institution. Best that you confirm with your bank about the guarantee for the child’s trust account. You may also visit this page for more information on government guarantee.
Hope this helps.
Best,
Maria