Financial investment for children as a tax-saving model

Children are a great asset in the life of parents and as high as the financial burden may be for some families: children are an investment in the future, regardless of whether this is viewed from a social or purely economic perspective. For many parents, an important part of this investment is the early saving of small to medium-sized amounts of money in order to provide the offspring with a certain financial cushion for training, studying or driving a license. Often these are savings books or savings accounts with relatively low interest rates.

What many parents do not know is that children and even babies in Germany can open and manage the mostly higher interest-bearing day and time deposit accounts. This not only has advantages in terms of return, but also allows parents to use the child’s generous tax-free allowances of over EUR 9,000 per person per year. As nice as that sounds, the opening and use of such child accounts in practice is often bumpy.

An example: the critical investor model family

Mr. Max Rendite and his wife Ruth Rendite are married and have two children. While the son man is already 12 years old, the 8-year-old daughter of the family still enjoys her puppy protection. Mr. Rendite and his wife have considerable capital assets of EUR 350,000. Unfortunately, the couple have already exhausted their saver’s lump sum amounting to EUR 1,602 (as of 2014), so that the capital gains tax of currently 26.375% (including the solidarity surcharge plus any church tax) is due on all investment income above this amount.

Mr. Rendite, who feels primarily responsible for the family’s financial investments, only parked the entire financial assets due to lack of time in a call money account with 1.50% interest per year. Of those at the end of the year The bank immediately deducts the 5.250 EUR interest paid after taking into account the saver’s lump sum, including the solidarity surcharge of EUR 962.16. But this tax deduction would not have to be if the family distributed their assets to the offspring in one or more daily or fixed-term deposit accounts.

Minors with generous tax allowances when saving

Many parents still believe that their children have no special rights and obligations due to their minority and lack of income in terms of investment and taxes. In fact, the tax office treats minors (whether baby, child or adolescent) like any other saver. Correspondingly, a minor child is also entitled to the same allowances (see table below for current values).

With an assumed interest rate of 1.50%, up to EUR 612,733 could theoretically be invested in a child’s account, without the underage account holder having to pay taxes. At an interest rate of 2.00% it would still be EUR 459,550 and at 2.50% it would also be an impressive EUR 367,640. But be careful, this is a purely theoretical consideration, since in practice there are often restrictions imposed by the rules of health insurance (see section on "Stumbling blocks in the investment for children").

Prevent tax deduction through non-assessment certificate

As is usual with savings accounts, an exemption order can also be entered for accounts managed by minors in order to prevent the payment of the withholding tax for interest income up to EUR 801 (saver lump sum). If there are several accounts, it may also make sense to distribute the saver lump sum across the various savings systems.

Really interesting is the investment in the name of the child but only through the so-called non-assessment certificate, often only called NV certificate. This can be applied for at the responsible tax office in the place of residence (see form NV 1A "Application for the issuance of a non-assessment (NV) certificate") and after submission to the bank ensures that the bank no longer makes any deductions from the interest income. The prerequisite for this, however, is that the account holder (in our case the child) is unlikely to generate any income above the basic allowance (currently EUR 8,354) in the reference year. If, contrary to expectations, the income is higher than this amount, a tax return must be prepared for the child and any underpaid tax paid. The nice thing about an NV certificate is that it is valid for 3 years and, once deposited in the original with the bank, means that no final withholding tax is paid for this time. In addition, the classic exemption order is then superfluous.

But be careful, the NV certificate only prevents the withholding tax from being paid from the date of the bank note. In addition, each bank requires its own original, so that in the case of several accounts, a corresponding number of copies should be requested when applying. Some tax offices also check more or less closely whether the money invested really belongs to the child and is invested in their interest. If in doubt, please enclose the informal gift contract with the application for the NV certificate in order to make the investment for the child credible to the tax office (see "Stumbling blocks in investing in children").

The optimized investment of our model family

Our model family could save cash by skillfully redistributing their wealth and by taking advantage of the children’s allowances. For example, it would be possible to transfer the offspring as part of a donation and each of these amounts as 1-year fixed deposit at 1.80% to invest in his name. In this case, the parents would have to be entered as authorized persons, since the two children have only limited legal capacity. Ideally, the parents would also apply for a non-assessment certificate from the tax office and submit it when opening the fixed-term deposit accounts for the children.

With such a distribution of the financial investment, the family would generate interest income of EUR 5,980 per year, which would remain completely tax-free due to the exemption from the parents (savers’ flat-rate amount of EUR 1,602) and the NV certificates of the children. Compared to the initial situation, this corresponds to savings of EUR 962.16 and thus an increase in yield of 0.27% (EUR 962.16 / EUR 350,000 = 0.0027). Incidentally, with such a shift, it may make sense to optimize the parents ‘investment amount in such a way that they do not yet make full use of their savers’ lump sum of EUR 1,602, since the future increase in wealth mostly happens to the parents and not to the children, so that a little buffer in the allowance certainly doesn’t hurt. In our example, on the other hand, we optimized the parents’ remaining balance of EUR 106,800 to make full use of the saver’s lump sum.

With this optimized investment, Mr. and Mrs. Rendite and their children would certainly not become a millionaire family overnight, but could certainly save a few euros over the years. The whole thing is also worthwhile, the higher the wealth and the higher the current interest rates. This constellation can also make sense with a view to a later inheritance, since the early use of the tax-free allowance (currently EUR 400,000 per parent and child every 10 years) can later avoid high taxes, especially for wealthy families, as part of a possible inheritance. For families with relatively small amounts of money, however, it often makes little sense to switch to children. A limit of around EUR 200,000 can be seen here as a limit, from which parents should think about optimizing their own investments.

Stumbling blocks when investing in children – what you should pay attention to

Investing for or on behalf of your own children (e.g. in the context of a call money account) offers clear tax advantages, but at the same time it is not entirely without stumbling blocks. We have to go back a bit. Parents have a duty of care towards their children, which includes personal care (e.g. education and care) and wealth care. Wealth care is clearly regulated in the Civil Code and ultimately primarily describes the obligation of parents to manage wealth for the benefit of their own children. The parents’ disposal of these assets is only possible to a very limited extent. So it says in § 1642 BGB: "Parents must invest the child’s money, which is subject to their administration, in accordance with the principles of economic wealth management, provided that it is not available to cover expenses.“In concrete terms, this means in practice: Investments for children should generate a reasonable return in the current market and at the same time have a low risk. In addition, parents are not allowed to use the children’s savings accounts freely and at will.

On the one hand, as clear as this seems to be, on the other hand, the judgments in practice are contradictory for ordinary people. A lawsuit at the Federal Court of Justice in Karlsruhe in 2004 involved a couple of parents who wanted to transfer the investment plus interest back to their own account at the end of the term of an investment in the name of the children. However, the bank refused to carry out this transfer because it suspected the abuse of the powers of representation of the parents (return of the money despite the donation to the children that had already taken place). The BGH ruled here that the bank had to transfer the amount back, since a gift to the children was not yet proven by the financial investment in their name alone (Case number XI ZR 220/03). The parents were again free to dispose of the investment plus interest, although the tax question was not clarified in this judgment. The judgment of the Saarland Higher Regional Court gives a slightly different impression Case number 4 U 8/07 – 2 a. Here, a daughter claimed the time deposit that her father had put in her name years earlier and was right. According to the judges, an investment made in the name of the minor is automatically transferred to his or her possession. Here, too, the question of tax law was left out.

The confusion seems to be perfect, but only with regard to the material law question, that is, to whom the money actually belongs after the investment – the child or the parents. It is undisputed, however, that the child’s tax-free allowances can only be used credibly if the assets are within the scope of a gift has been transferred to the children and the investment income is used for the benefit and in the interests of the children. This can be read z. B. in two judgments of the Federal Fiscal Court (see Case number VIII R 19/98 and VIII R 42/01). We therefore advise you to draw up an informal gift contract for an investment in the name of the children, especially for larger amounts, and to have it signed by all those involved (parents plus child). So there is clarity both with the tax office and within the family about the access options of the parents, which should always act correctly for the benefit of the child and not in their own (consumer) interest.

Parents should also note that as soon as the child has reached the age of 18, as a registered legal representative, they lose the right of disposal over the children’s daily and fixed-term deposit accounts. When the child reaches the age of majority, the bank also switches access to the account so that the children can then freely use their credit. An important point when investing in the name of the children, regardless of whether with the aim of tax savings or the provision for the offspring, is the existence of trust. After all, after the age of 18, it is only possible to dispose of the account balance with the child’s authorization.

Caution is also advisable if your own children are covered by the parents’ statutory health insurance free of charge. Because they can only remain a member free of charge as long as their income (including capital income / interest) does not exceed the amount of EUR 395 (EUR 450 for marginal employment). The interest income of the children should therefore be kept under the mark of EUR 5,541 (EUR 395 x 12 months + EUR 801 saver lump sum) in the year. This restriction does not apply to privately insured children. If a child does get over the 5,541 EUR mark, it must be against one minimum contribution of EUR 137.33 (plus any contribution to long-term care insurance, if applicable), either legally or at the tariff of the respective provider.

Find the right investment for children

If the stumbling blocks mentioned in the previous section have been overcome or are simply not a problem, there is nothing standing in the way of the system for your own children and thus possible tax savings. Classic savings and investment accounts with low risk are certainly of primary interest as investments for minors, since statutory deposit insurance. In the past, the savings book was the first choice, but today it rarely makes sense due to the low interest rates. On the other hand, better returns are usually obtained from overnight and fixed deposit accounts, such as those used by adults to an increasing extent. Unfortunately, many banks only offer their higher-interest investment accounts to adults, so that minors are often left out. The classic savings book, student account, pocket money account or driver’s license account is always available for minors, but it rarely offers really competitive interest rates. Ultimately, it is therefore worth the somewhat longer search for a bank that also offers its standard products for children. You can find out which banks belong in our comparisons. In the Table for overnight money are z. B. All offers for children are marked with a green family symbol (e.g. the RaboDirect, ING-DiBa andYapi Kredi Bank). The Comparison for time deposits on the other hand, shows in the detail view by a green check mark next to "Account opening for children" whether minors are allowed or not.

Account opening for minors: requirements & proof

In addition to the well-known care for the child (personal care), parental care in accordance with section 1626 of the German Civil Code (BGB) also includes property care. This includes the perception of the child’s financial interests by the parents, in particular the preservation of assets in connection with a conservative investment. For this reason, the parents remain authorized to dispose of all accounts until the child’s 18th birthday, regardless of whether the child has limited legal capacity (from the 7th birthday to before the 18th birthday) or is not yet legally competent (before the 7th birthday).

According to the Money Laundering Act, all banks in Germany are obliged to clearly identify the identity of the account holder and any authorized parties. This also applies to the two parents. The majority of direct banks use the Postident procedure for this, in which the relevant people in the post office are identified by means of ID or passport. For child accounts are also depending on the custody situation additional Providing evidence that the entire process is often somewhat more complex than that of adults.

Unfortunately, the documents that are specifically required to open an account vary from bank to bank, so we advise you to check with the hotline again about the necessary documents. In the past, many users sometimes had long delays and corresponding upset when opening an account, because it was not clear which documents should actually be sent. Especially with divorced or separated parents, things can quickly get a little more complex. In contrast, married parents usually only need the child’s birth certificate and the marriage certificate. In addition, both parents must also use the Postident procedure to legitimize themselves. The same applies to the child if he is at least 16 years old. Otherwise, the birth certificate is usually sufficient to legitimize the minor.

Special case of opening an account through a third party (e.g. grandparents)

Want z. If, for example, the grandparents open a daily allowance account for their minor grandchild in his name, the matter becomes even more difficult, often even impossible. So grandma and grandpa have to present the birth certificate of the grandchild (often even in the original) for opening the account and persuade the parents to sign the account application, since they are also entered as authorized persons in this constellation. In practice, this means that both parents have to go through the authentication process (e.g. via Postident). However, some banks (unfortunately especially those with particularly attractive conditions) do not allow third parties to open an account, so that many grandparents or sponsors ultimately only have the way to the local savings banks – certainly not the best alternative from a yield perspective. Overall, we therefore advise you to tackle savings for third parties in your own accounts and e.g. B. to enter the grandchild as a beneficiary (if the bank allows it) or to pass on the financial assets as part of the inheritance.

Our conclusion on investing for children

In particular with larger amounts of money, investing in the name of your own child can make sense, especially if the parents want to transfer a large part of the financial assets to the offspring anyway. With over EUR 9,000 per year, minors each have generous allowances that can be used to invest and ultimately to save tax. But be careful, the money should actually be transferred to the children as part of a gift (currently EUR 400,000 per parent is tax-free every 10 years) and ideally an informal gift contract and then invested for their benefit. Only then will the tax office participate in this tax saving model in the long term.

Parents should also be careful if their children are included in the statutory health insurance for free. Here, the annual investment income must be kept under the mark of 5,541 EUR in order not to have to pay additional contributions to health insurance. If these points are ticked off, the tax savings ultimately only stand in the way of opening the account. At the moment, classic conservative investments are probably the most suitable day- and Deposit Accounts, since the return here is not exhilarating, the security for it is quite high.

Unfortunately, the opening of accounts for minors / children is often a bit more complex than normal, which is why we advise you to check with the respective bank again about the necessary evidence to avoid delays. But once the account is opened, the parents can look forward to a very nice tax saving every year. In addition, the children will certainly not complain about a certain cushion for training, studying or maybe even the first apartment.

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