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Teaching children the value of saving

BS Bureau | January 23, 2003

Saving and investing on behalf of children may be a good idea, but here's a better one: help them to understand the value of what you are trying to do.

A good way to begin is to start early. Children in the 6-10 age group are old enough to understand straightforward savings in bank accounts. So that's a good enough time to open an account in their names.

Most parents open accounts for kids and then operate it themselves. This is, of course, a legal requirement. But it does nothing to help your kid learn. Here are a few tips to make even a simple bank account interesting to kids:

  • Once a quarter, tell them how much money there is in their accounts - and how it has grown.
  • For kids who know how to write reasonably well, start showing them how to fill in deposit slips. After a few tries they will know how to do it themselves.
  • If you have to pay their school fees from their accounts, ask them to fill in all the details in cheque-books - after trials on rough paper - before you sign the cheque.
  • Earmark a portion of the money for use by them for anything they want to do - buy roller-skates, popcorn, whatever. This will show them both what it costs to own various things, and also how much saving has to be done to buy something.

Banking on kids

Many banks offer special accounts for kids. ICICI Bank, for example, offers a Kid-e-bank where even cheque books are customised.

As soon as your kid is old enough to understand what a bank is, you should start her off on savings through banks.

Should you set up trusts for children?

Once upon a time, if you wanted to leave lots of money to your children without allowing the taxman to get his hands on the stuff, you would set up a trust.

But thanks to some assiduous attempts by the government to plug the loopholes, setting up a trust does not make as much sense as before.

Says Vinod Jain, a Delhi-based chartered accountant and a member of the central council of the Institute of Chartered Accountants of India: "While private trusts are one of the options available, personally I wouldn't opt for them. I would invest in some (other) schemes."

Then why do it?

Answers Jain: "The private trust option may suit a person who cannot, or does not want to, manage the resources himself and can thus benefit from the expertise and experience of the trustees who will manage the trust property. The trust option is only for those people who want to invest above Rs 10 lakh (Rs 1 million)."

If one is interested, how would one go about it? First, you should consult a professional and draft an appropriate trust deed clearly providing for the rights and responsibilities of the trustees, the benefits which should accrue to the beneficiaries (your children, for example) and advice on related tax implications, including the registration of the deed.

The fees and completion of all the necessary formalities would depend on the nature and size of the trust property and the legal complexities involved.

Under the Indian Trust Act, any person can form a trust for the benefit of specified beneficiaries by making a declaration of trust and executing a trust deed transferring the trust property, or money, in favour of the trustees. Experts say a written and duly executed trust deed by the settler (the person setting up the trust) of the trust is advisable.

In case the trust's assets comprise immovable property, it may be legally necessary to register the trust deed to enable the transfer of the legal title as specified.

"Even in other cases, registration of the trust deed, although not legally mandatory, is advisable to protect trust property and beneficiary rights," says Jain.

What happens to the money/property handed over to the trust? In case a trust is created, say, for financing the higher education of children or their marriage, it would be necessary to invest the trust money in avenues that can earn a reasonable return without undertaking high risk.

A number of investment options are available in the financial market and the trustees will be free to decide on a particular option after estimating the expected return and assessing the risks involved.

Unless otherwise specified, investments can be made in equity and debt instruments, government bonds, RBI bonds, mutual funds, UTI schemes, bank fixed deposits, Indira Vikas Patra, post office schemes - almost anything.

It is also appropriate to specify in the trust deed which beneficiary is to receive what proportion of the incomes, when received, and at what stage.

Does the taxman get a bite of your rupee? Yes and no. The contributions made by the author of the trust in favour of the trustees do not attract any tax. In case the beneficiary is minor, the income accruing to minor children would be clubbed with those of the parents.

Some persons may argue that in case the income arising out of the trust is not accruing or arising to the minors currently but is accumulated by the trustees for providing deferred benefits for financing higher education or other uses after they become majors, the clubbing provisions of section 64(1A) may not apply.

This interpretation of the law is too technical and may not be accepted by the assessing officers and could invite litigation between trustees and the tax department.

Taxation also varies a bit, depending what kind of trust you set up. You can basically set up two kinds of trust - specific and discretionary. In a specific trust, the share of income or property for each beneficiary is specified.

In this case, the trustee is assessed to tax as a representative assessee on the income of the trust as if the assessment is being made in the hands of the beneficiaries.

However, if you set up a discretionary trust, the income is taxable at the maximum marginal rate of income tax.

When a discretionary trust is created by the will of the author of the trust and the beneficiary's income from other sources chargeable to tax is less than the current exemption limit of Rs 50,000, and there is only one trust created for one beneficiary, the income of the trust would be taxable at the normal rate of income tax prescribed for association of persons or individuals.

Who can run the trust?

The author has to appoint them - and he can appoint himself or his spouse as trustee. There is no prescribed fee payable to the trustees. Trustees may not be entitled to any remuneration or fee except reimbursement of expenses, unless they are specifically permitted to charge fee or costs in terms of the trust deed.

When a trust accomplishes its purpose - say it pays for a child's higher education or marriage - the trust deed normally provides for how to dispose of the balance trust property or trust income.

The trust deed could also specify that the trust would automatically be treated as wound up on the accomplishment of its purpose. The money is paid to the beneficiary after excluding the winding up costs.

How trustworthy?

Given the absence of tax-breaks, trusts make sense only if you have a large amount of money to bequeath.

Usually, below Rs 10 lakh, they are not worth the trouble. But if you have large properties or assets to manage, and you don't want to take the trouble of managing them, the expertise of trustees should be of help.

Trusts may also be useful if you have handicapped dependents who may survive a long time after you are gone - and still need money and care.

Otherwise, you would be better off investing in mutual funds, tax-free bonds and public provident funds on behalf of your children.

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