What is an In-Trust Account?
- investment account opened by an elder (usually parent or grandparent) naming child as beneficiary
- child does not have access to funds until he/she turns age of majority; determined by province (usually 18)
- once child turns age of majority, they have access to funds and can do whatever they choose with that money
- can contain several different types of investments, such as stocks, bonds, GICs, mutual funds etc...
- contributor (usually parent or grandparent) decides when they will contribute and how much they will contribute
- usually have someone named as trustee who will take care of where the funds are invested and manages the account
In-Trust accounts are a great way to save for a child's future, whether it be for education, buying a car or even something like down payment on their first home. However, just like all other strategies, it has its pros and cons.
Pros:
- There is no contribution limit
- Anybody can contribute to the plan
- There is no restriction on how the funds are to be used by beneficiary
- Tax benefits (capital gains taxed in hands of beneficiary)
- Income on income (second generation income -- i.e. re-invested dividends that produce dividends) get taxed in the hands of beneficiary**
- Contributor decides when to contribute and how much they want to contribute
**Note: In most cases the tax bracket of the beneficiary will be very low or even zero in some cases, once they reach the age of majority
Cons:
- No government grants
- Dividends/interest on funds invested by contributor are taxed in hands of contributor (first generation income) --> this can be minimized or avoided by investing into a fund with little/no distributions
- No tax deductions
- Once child reaches age of majority, they can do whatever they please with the money (even if it is against the wish of the parents)
- usually no guaranteed return (if invested in stocks/mutual funds)
- once the funds have been contributed, they cannot be taken back by the contributor
Any time the child gets birthday or holiday cash gifts, they can be invested directly into the account. Also keep in mind, the Child Tax Benefit can be deposited directly into the account as well. If the child has their own income (i.e. from chores, babysitting etc...), they can also deposit the funds into the account.
Although this strategy can be a great way to save for a child's future, it probably isn't the best choice for Education Savings. Some parents decide to use In-Trust because of the flexibility and unlimited contribution space, but not having the Government Grants is a huge con, and can drastically reduce the amount of funds that are available for the child.
However, if the parents/grandparents think there is a good chance that the child will not pursue post-secondary education, this might be something that would be beneficial for them. This strategy is often used when the contribution space in the RESP for the grant has been maxed out (i.e. $2500 already contributed to give maximum of $500 grant, in the year).
Please consult your financial advisor before making any decisions. Also, in case of more complicated trusts (formal trusts), it is also recommended to consult a lawyer so the account is set up properly and all the legalities are understood. Please do not hesitate to contact me if you have any questions or require further information.
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