How to manage a child’s investments who is no longer a minor?

Financial Planning | admin | January 8, 2012 at 1:04 pm

Manohar has been saving and investing for his son, Rahul, ever since the child was 4 years old. Rahul is now 22 and has completed his engineering degree. He is preparing to go abroad for a post graduate programme. There are equity shares, mutual funds, deposits, bonds and a PPF account in Rahul's name. Manohar wants Rahul to develop a sense of financial independence and fall back on the investments only in an emergency or dire need. He wants that Rahul should maintain the investment portfolio rather than spend the corpus. Now that Rahul is no longer a minor and the investments are in his name, how can Manohar manage these investments?

As long as Rahul was a minor, the investments and income were Manohar's and could be clubbed with the latter's income. Now that Rahul is no longer a minor, he can operate the accounts and access the investments in his own right. Since he doesn't have to pay any estate duty or tax for the transference of wealth, Rahul is free to use this wealth as he wishes. The income earned on this wealth will now be Rahul's and liable to be taxed.

Manohar can get a power of attorney executed in his name, which enables him to access the investments and manage them on his son's behalf while the latter is away for his studies. The investments have been made in Indian rupees and, except for the annual limit set by the RBI, it will not be repatriable abroad. Manohar can also create a will, which includes the investments he made in the name of his then minor son and indicate how and when the money should be used. If the amount involved is large, he can also consider creating a trust with specific clauses, which indicate how Rahul can access the funds.

If Rahul's higher studies are not funded by a scholarship, Manohar can encourage his son to take an educational loan, fully or partially, so that the accumulated wealth is not tapped for education. At the same time, Rahul will have the responsibility of repaying the loan and will begin to exercise caution when he starts earning an income. If Rahul decides to come back to India, he can use the investments. If, however, he chooses to stay abroad, his ability to access the wealth created in India might be limited.

Source: Economic Times