March 7, 2013 by Dymphna 5 Comments

Give Your Children a Healthy Relationship with Money

As many of you know, I try to make myself available to my students on almost any topic as it relates to real estate investing, finance, or financial planning and asset protection.  That’s because, like many things in life, aspect of one area tends to easily spillover into another.  They’re all related, aren’t they?

So, if you’re in real estate investing, you’re also into finance and asset protection. Or at least, you should be. We develop and apply real estate strategies to maximize profit and minimize the risk to our money. And the common denominator in all of those areas is, of course, money. We think about how to make it, how leverage it, how to protect it, and so forth.  But there’s another side that is not considered as much that really ought to be.

If you’re like me and have children, one of the most important things you can teach them is to develop a healthy attitude towards money.  It’s a huge responsibility. But believe it or not, your children do listen to you, what you say, and how you react to the idea of money and wealth.

You are your child’s teacher

Kids don’t just learn in school; most of their “life” education comes from the home. So think for a moment, what your attitude towards money might be; and be aware of what you’re teaching your children through your own words and actions.

I remember how my parents’ viewpoint towards money really affected my own outlook, and I personally had to get past some of the, shall we say, less than advantageous attitudes” that I had “picked up” at home.  It took quite a while to do so, too.  Remember, we are our children’s most important teachers in life, whether we realize it or not.

One way to provide your children with a healthy attitude and education toward money is to include them in your financial planning and money management. Get them involved in the process of handling money. How do you do that?

One of the best ways of doing that is to set up a trust.  From that trust you can distribute passive, that is, unearned income to your children up to certain limits.  But is that really a good idea?  Perhaps a better way to teach your children about money is to pay them actual earned income from the trust.

Trust and earnings

Let me explain why I think that’s a wise thing to do. If you pay your kids earned income from a trust for chores they do around the office or the home, or even helping give a newly acquired property a scrub, then they know that will have earned it.  Of course, the hourly pay rate has to be proportionate as to how much you pay them for how long they work.

But what that means for your child in terms of earnings can still be pretty impressive.  After low income rebates kick into gear, your children can earn around thirteen or fourteen thousand a year tax-free. (You can find the up to date figure on the Australian Tax Office website).  Not bad, huh?

Of course, not all kids will be able to earn that much–they have to be of a reasonable age to be able to put the time in and do the work. For example, my youngest–who is only twelve–is not going to be doing too much yet; he’s in school most of the time. But my two older kids can certainly earn that; especially my daughter who helps me around the office and at home quite a little bit.

Learning how money works

But earned income is much more than just teaching your children the value of money of earning a salary.  It’s also about teaching them how money works.  By paying your kids an earned income, you’re also obligated to set up a tax file number for each of them, a superannuation plan, workers’ compensation, and all the other things you would need normally for any other employee. Each child will also need his or her own bank account.

When they ask you why they have a tax file number, and these other things, you will have the opportunity to educate them about those money items and how they work.  That is a very valuable education that most children don’t receive because most parents know so little about them themselves!

Therefore, by treating your kids as employees and paying them for their work, you are going a long way toward helping them become self-sufficient adults.  Whether you own a business and hold it in a trust or real estate that pays you passive income that you hold in trust, either one of these can pay your children earned income.  And when you get right down to it, it’s really to your benefit any way.  Think about it; if your children are not self-sufficient when they’re adults, just whom do you think they will come to for money?

Pay now or pay later

This brings up another important point.  If you are “paying” your children for tax purposes only, but are not really paying them, that is, the money never leaves the trust account, which can cause you big problems down the road.

What happens is that because your children don’t physically get the money, your accountant “takes out a loan” from the beneficiary (your children) to the trust on the balance sheet.  And you know what?  That money adds up over the years.  If that money is not paid to the kids, either in cash or to pay for education costs, then that child has a right to demand that cash as a distribution from the trust.  This can get ugly if you have a falling out with a child; he or she will legally have every right to force a distribution.

Teaching your children the right attitude about money, and respecting the power and responsibility is one of the most important investments you will ever make!