Many seniors who have accumulated substantial assets over their lifetimes are looking for ways to use that wealth to help their grandchildren get a good education.

Foresters Financial is assisting that intergenerational wealth transfer with its new education bonds.

These bonds allow beneficiaries to withdraw funds for a wide range of purposes, including school fees, excursions, sports equipment, and university accommodation.

Foresters Financial Chief Executive Emma Sakellaris says that, with school and university costs on the rise, there is strong demand from parents and grandparents for investment options that enable them to help the younger generation. Many are not aware that they can use tax-effective structures such as education bonds that can quarantine wealth for that purpose.

“New parents are very mindful of inflation, very mindful of interest rates, and regardless of what [rates] do, it’s going to take a long time for people to recover from the last 12 months of interest rate rises,” she says.

“It’s made a massive dent on their ability to budget and build for the future.”

Money placed in education bonds is pooled and invested in assets such as shares, property, bonds, and cash. The capital or earnings – or both – can be withdrawn anytime, plus withdrawals for education expenses (from textbooks to travel) attract additional tax benefits. Importantly, education bonds are capital gains exempt.

Sakellaris says the rise of blended family structures has sparked concerns that money is used as intended, so some grandparents prefer education bonds when aiming to control and plan for wealth transfer over cash transfers, family trusts, or wills, which can be challenged.

In the event of death, an education bond is paid to a nominated beneficiary, which provides peace of mind, unlike other assets which are dealt with under probate and estate processes. 

The education bond sits off investors’ personal balance sheets, and is non-distributing, which may appeal to high net-worth investors looking to minimise their personal income tax. 

The education bond is taxed as a “scholarship plan”, meaning Foresters gets a tax deduction of 30%, which it passes on to the investor. For every $100 withdrawn from the bond’s investment earnings account, about $30 is a tax benefit. 

At any time, a capital-only withdrawal can be made tax-free.