Education Planning

"In Trust For” Account

It is possible for you to save for your children’s future education costs and achieve significant tax savings without an RESP, depending on the type of investments you choose.

This strategy involves opening a regular investment account in your own name “In Trust For” your child and investing in an equity mutual fund that seeks capital gains while minimizing interest and dividends. Although any “first generation” interest or dividend income is still taxable in your name, the amount should be relatively small.

More importantly, any realized capital gains will be taxed in your child’s name, so the total tax payable on any income from this account should remain low for several years. If the money in the account belongs to the child (i.e., Child Tax Benefit payments, inheritance proceeds, job earnings), then any interest and dividends are also taxed in the child’s name as well as any realized capital gains.

Although this type of informal trust account is not fully tax-sheltered like an RESP, you will be able to access the growth portion at any time for any purpose that benefits your child, and not just to pay for expenses while your child is pursuing a higher education. More importantly, there is no annual contribution limit to an “In Trust For” account.

It is important to note that upon reaching the age of majority, your child is within their rights to assume full control over their account. Parents, who want more control over the funds and wish to avert some of the potential drawbacks of an informal trust, can enter into a written trust arrangement or formal trust. Legal fees and a special trust tax return however make the formal trust a more costly arrangement to set up and require more time to administer.

A number of other legal, estate, record-keeping, tax, and investment factors must be carefully examined when considering non-RESP strategies. This information provides only a general overview of “In Trust For” accounts. Consultation with a qualified independent financial planner or legal advisor is essential to address tax issues and to ensure that a formal trust arrangement is set up properly.

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