On Topic

Child Education

Informal "In-Trust" Accounts

An alternative to the Registered Education Savings Plan is the informal "in trust" account. The "in trust" account can be a flexible savings vehicle because the funds can be used for any purpose that benefits the beneficiary. It is referred to as informal because no formal trust document is signed, but a beneficiary is designated. Accordingly, all savings and earnings must be used for the benefit of the beneficiary.

An informal "in trust" account may be used by itself or in conjunction with an RESP. The RESP is a tax-advantaged savings vehicle which allows contributors to qualify for the Federal Government grant, while an informal trust account can be used to make contributions beyond RESP limits. As is the case with RESPs, informal trust accounts allow for complete flexibility in selecting securities for the plan, without any restrictions on foreign content.

Unlike RESPs, which allow earnings in the plan to compound tax free, informal trust accounts do not allow earnings to be tax advantaged. Instead, they allow for a contributor to divide some of the taxable income in the plan with the beneficiary. Interest and dividends are taxed in the contributor's hands, while capital gains are taxed in the hands of the beneficiary.

The construction of vehicles for funding the education of children is complex and should be reviewed with an Edmond Financial Group financial planner.