There is a good amount of paperwork to be planned and completed as a guardian. Consult a financial advisor to manage your child’s finances.
A child turning major is a big event in her/his financial life. While many enthusiastically open bank accounts to allow their child to learn how to deposit and draw funds, turning 18 also empowers him/her to deal with finances independently. There are a number of things to do and, since she/he has planned a birthday party with friends, there is enough time on hand to take care of the other things, which only parents can.
First, all investments made in herhis name as a minor will no longer be operable, unless the status change processes are completed. Investments in shares, mutual funds, bonds and others, made in her/his name as a minor, will carry her/his date of birth. The registrars will tag such accounts from the date she/he turns 18 as temporarily not available for transactions, until the status is updated. You as a guardian will not be able to transact in these accounts as before.
For the minor now turned major to operate the accounts, a set of procedures have to be completed, which may take time. It may be a good idea to plan for any withdrawal from investments in her/his name, for important reasons such as education and fees, before she turns 18.
Second, your child will be able to operate all accounts and investments only if she/he has been registered as a regular individual investor. This requires completion of all formalities as for a normal account. The know-your-customer (KYC) formalities have to be completed, along with proofs of identity and address. A permanent account number (PAN) will have to be obtained. All these have to be completed after the child turns 18, so she/he is able to sign and obtain these documents in her/his name, and not you operating as guardian.
Third, all financial transactions will require a valid signature. Your child will have to decide and freeze on a signature she/he will affix on her/his transactions. Since she/he is likely to make long-term investments, to avoid problems on a later date when her/his signature has to be matched, she/he should be trained to sign-off fairly consistently.
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The signature of the child will have to be attested by the bank manager, to be accepted for the first time applications she/he will make for change in status in her/his investments, her PAN and KYC applications.
Fourth, although the child is legally allowed to hold investments in her/his own name, you may like to ensure that transactions are not carried out without a complete understanding of the implications. You may like to give her/his the time to learn the ropes of finance and investing, before she/he deals with the investments herself/himself. Most investments in the name of a minor are held in single names, with no joint holders. These will now become sole-holder investments in herhis name. It is important to add yourself as a joint holder where possible, keeping the operating option as ‘jointly’ rather than ‘either or survivor’.
Where changes to holding pattern are not permitted, as for example in a demat account, a new joint account with her/his being the joint holder with you can be opened, and the securities transferred as an off-market transaction. Capital gain taxes will, however, apply to these transfers.
Fifth, the clubbing provisions that add investments you made in the name of a minor child to your income tax liabilities, will no longer apply once the child has turned 18.
It is possible for the child to earn income in own right, from herhis investments, and manage the tax liability independently. It is important to consult a tax advisor who can optimise the tax liability, so you do not end up spending taxable income where optimal solutions of using income earned in herhis own name, is possible.
There is a good amount of paperwork to be planned and completed, and financial advisors should extend such services to customers, apart from selling them products.
The writer is managing director, Centre for Investment Education and Learning. The views expressed are her own
