By Mary Holm
Would there be a problem with this, as I doubt if any of them has an IRD number?
A. All shareholders should have IRD numbers, but that shouldn't present a problem. There are though, some other things to consider.
To get IRD numbers, ring Inland Revenue's forms and stationery line, 0800 257 773, and "ask" for an IR595 form for each grandchild. (Actually, you don't ask anyone. You push buttons.) Have your IRD number handy before you call.
The kids' parents will need to sign the forms, and send in copies of birth certificates or other identification.
Inland Revenue says it will process the forms within five days of getting them. After that, the grandchildren - or their parents on their behalf - probably won't have to file tax returns each year. But it may well pay them to do so.
That's because dividends from many New Zealand companies are fully imputed, which means shareholders get credit for the 33 per cent tax the company has paid.
For shareholders in the 33 per cent tax bracket, that simply means they pay no further tax on the dividend.
But if a shareholder is in a lower tax bracket - as most grandchildren are - they get more than that. The imputation credit will reduce the tax they pay on other income, such as interest or money from a part-time job.
Or, if they have too little other income to use up the imputation credit, they can convert the excess into a loss and use it to reduce tax in future years. (Instructions on the tax return explain how to do this.)
There's no limit to how many years' losses can be carried forward, says Inland Revenue, as long as the taxpayer files a return each year.
Two other points that might affect you:
* If you give away shares worth more than $27,000 in any one year, you're in for gift duty. So, if you're talking a larger amount than that, you might want to spread the gift over a few years.
* There are minimum holdings of shares, says Tony Popplewell of Computershare Registry Services, the country's biggest share registry.
If the share price is less than 25c, the minimum holding is 2000 shares.
At 25c to 50c, the minimum is 1000 shares. At 50c to $1, it's 500 shares;
$1 to $2, it's 200 shares; $2 to $5, it's 100 shares; $5 to $10, it's 50 shares; and more than $10, it's 25 shares.
That translates to a minimum value between $200 and $500, depending where the share price happens to fall in the scale.
Popplewell says some companies are stricter than others about these minimums. But companies generally don't like the expense of dealing with tiny shareholdings.
Also, your grandchildren might find it difficult to get rid of less-than-minimum holding, and could wind up paying high brokerage to sell.
Having said all this, I must say that I don't think it's a good idea for anyone - grandchildren included - to hold shares in just one or a few companies.
There's too big a risk that the value of those shares will fall.
You could reduce that risk considerably by selling the shares and, instead, giving your grandkids units or shares in a managed fund - perhaps an index fund that invests in overseas shares.
Whatever you decide to do, make allowances for any more grandchildren to come.
They shouldn't miss out on Grandma's generous gesture just because they were born later.
Firstly, it is simply not true to say that NZ interest rates are higher than those in the US. A six-month CD (term deposit in your parlance) can be secured at 5.8 per cent. I doubt that rate can be matched in New Zealand.
Further, many such deposits are guaranteed by US Government insurance. I know of no ordinary bank term deposits in New Zealand which are secured by Government insurance.
Secondly, in the matter of potential for exchange loss, it has been my experience that the NZ dollar generally weakens against the currencies of its trading partners. Over time, I would say that the potential for exchange rate gain is a lot higher than for exchange rate loss.
Finally, on the matter of tax, the US Government deducts withholding tax, 15 per cent for NZ individuals (on interest earned) and in accordance with the tax treaty which exists between our two countries. I understand that this tax paid stands as a credit in the tax return filed by a NZ taxpayer.
A. I feel I must take issue with you over most of what you say.
There is some validity to your "firstly". You're right - although not screamingly so - about short-term investments. New Zealand interest rates are a bit lower, says Bank of New Zealand chief economist Tony Alexander.
But that's not true of longer-term investments.
On six-month Treasury bills, for instance, the US rate the other day was 4.88 per cent, while the New Zealand rate was 4.4 per cent.
But on 10-year Government bonds, the US rate was 5.87 per cent, while our rate was considerably higher, at 6.92 per cent.
In any case, my main point two weeks ago - that 9 per cent in the US is disturbingly high - doesn't change. As Alexander says: "On a short-term investment, that must be exceedingly risky".
You then bring up Government insurance. What you say is right - but almost certainly irrelevant.
We were told that the investment in question "cannot be entered through a bank or broker". The American Government doesn't insure investments like that.
Your "secondly" is a worry. Anyone who counts on foreign exchange rates moving a certain way is simply gambling. Consider the recent history of the US vs kiwi dollars. In 1979, the kiwi was worth 105USc, says Alexander. It then plunged. After the kiwi was floated, in 1985, it was worth just 45USc.
By 1988, though, it had risen to more than 70c. In 1993 it dropped to 52c; in 1996 it rose to 71c; a year ago it fell to 49c, and it's now in the low 50s. Where next? Who knows?
Your experience must be over a pretty short period.
Turning to your "finally", I've got a couple of quibbles with it.
Under our tax treaty with the US, the 15 per cent applies to dividends, not interest. If the US withholds tax on interest earned by New Zealanders, it's at 10 per cent maximum.
However, as I said two weeks ago - on good authority - non-residents of America are exempt from US tax on bank account interest.
To gain that exemption, says Merrill Lynch director William Stevens, you have to fill out a W-8BEN certificate every three years.
You wouldn't, by any chance, be feeling a bit touchy about me criticising a US investment, would you? Generally I think America is a good place to invest in. Its share market has done brilliantly in recent years.
But that doesn't mean every US investment is good.
I am the sole carer and, of course, my greatest worry is my son's welfare when I die.
He has two sisters and a brother, but they live elsewhere and are not involved.
My home is paid for, but run down, and I have a separate "lifestyle" block of 16 acres, without a house. It has about 200 chestnut trees (about seven years old and not earning) on four acres, and the rest grazing.
Total assets are about $400,000-plus, conservatively, including shares in eight New Zealand companies.
My income is adequate, and I can save since I am a non-smoker, drinker or gambler (apart from shares).
Would you recommend a trust for my son, and how does one ensure that he gets the benefit?
A: The experts say yes.
Setting up a trust will give you more control over what goes to your son, and who makes the decisions about his care.
If you don't, the Family Court would probably appoint a property manager after your death, says John Hanning, legal adviser to the IHC. That manager might do a great job, but who knows?
It sounds as if you want your handicapped son to get more of your estate than his sisters and brother.
If that's the case, it would be better to set up a trust now, rather than under your will, says Bill Patterson of law firm Rudd Watts & Stone. That would prevent your son's siblings from making a claim on your assets, after your death, under the Family Protection Act.
If you start a trust now, you can be a beneficiary, along with your son and, if you wish, his sisters and brother. The trustees could be told that, after you die, some or all of the funds should be used only for your son's benefit until he dies, says Patterson.
You may want any money remaining in the trust to then pass on to his siblings. If so, it's better not to make any of the siblings trustees - or at least make sure there's another independent trustee - says Hanning. Otherwise, the siblings might be tempted to spend less on their handicapped brother in the hope of inheriting more themselves.
So who should be trustees? Take into account who is most involved in your life and your son's life.
Some possibilities are the IHC Foundation (Box 4155, Wellington), which is part of IHC set up to do that work; a trustee company such as Guardian Trust or the Public Trust; or a lawyer or accountant. Your family lawyer may offer some advice on selection of trustees.
Hanning suggests you also involve the Personal Advocacy Trust (Box 6575, Wellington), which is a charitable trust that would have an ongoing relationship with your son after you die. It "will appoint a personal visitor who visits the intellectually handicapped person regularly after the death of a parent, and keeps an eye on things".
The Personal Advocacy Trust could also administer the assets in the trust, but it doesn't need to, says Hanning.
You should be aware, says Patterson, that a trust won't be fully effective until you've "gifted" your assets to it.
To avoid gift duty, you can make gifts of only $27,000 a year. So, depending on how many assets you put into the trust, it could take 15 years or so for you to complete the gifting process.
In case you die in the meantime, you can leave your son's share of the estate to the trust.
Before we "kill you off", though, let's pay a little attention to you.
You're taking care of your son, and you've done a great job of building up a diversified pool of assets that should provide well for him throughout his life.
Don't forget to treat yourself every now and then. You deserve it.
* Got a question about money? Send it to Money Matters, Business Herald, PO Box 32, Auckland; fax: (09) 480-2054; or e-mail: firstname.lastname@example.org.
Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information. We cannot answer all questions or correspond directly with readers.