A trust is a structure that allows you to set aside assets for another person. Trusts come in different shapes and sizes in Canada, including in-trust accounts that don’t require the same legal framework as formal trusts.
What is a trust account?
A trust holds assets for the benefit of a person called a beneficiary. A third party, known as a trustee, manages the assets provided by the contributor.
Formal trusts are established using a legal document called a deed of trust. Informal trusts, while arranged similarly, do not require the same legal structure.
Broadly, formal trusts, often set up by a lawyer, come in two categories:
Testamentary trusts come into effect when the testator (the person who sets up the trust) dies. The terms of the trust are established in the person’s will and set out what assets are held in the trust, who will be receiving them (the beneficiaries), who will act as the trustee, and how the assets will be distributed.
Inter vivos trusts, or living trusts, are set up during your lifetime and may carry tax advantages, the flexibility to control how your assets are used or spent, and the ability to keep the terms of your trust confidential. TFSAs and RRSPs are examples of inter vivos trusts.
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In-trust (also referred to as ITF or “in-trust for” accounts) are savings or investment accounts opened by an individual for the benefit of another person (often a minor child). These are often known as informal trusts because there is no deed of trust in place. Instead, the only contract detailing the trust relationship is the financial institution’s investment contract or account documents.
How in-trust accounts work
Once an ITF is opened, trustees can make contributions or investments, with no limits, into the account, on the child’s behalf. Until the child reaches the age of majority in their province, any withdrawals have to be used for their benefit. These accounts can’t be closed or modified without the beneficiary’s permission.
Once the beneficiary reaches the legal age of majority in the province in which they live, they are entitled to the account’s proceeds.
When is an in-trust account a good idea?
Many people choose ITFs because they allow the money withdrawn to be used for any purpose. For example, children can use the account to pay for education, or something entirely different when they reach the age of majority, explains Graham Priest, a certified financial planner and investment advisor with BlueShore Financial in North Vancouver, B.C.
“Some people do prefer this type of an arrangement because they feel it’s more flexible as to what the funds can be used for at a later date,” he says.
“You might have a situation where a grandparent has set up an RESP for a grandchild and contributions are being maximized there, and then a parent, perhaps, wants to set up something that would help supplement that. So then, a trust account or an informal trust account is something that they’ll sometimes look towards,” he adds.
Compared to a testamentary or inter vivos trust, an ITF requires less documentation and is often cheaper to set up. However, says Priest, these accounts come with a few considerations — the first is taxation.
“If it’s a minor child, capital gains are generally taxed in the child’s hands, but you get attribution back to the parents on income,” he says. That means parents end up getting taxed on dividends and interest unless the money being used originated from the Canada Child Benefit or the Universal Child Care Benefit.
Individuals with larger portfolio sizes, he adds, may prefer a formal trust as arrangements are more clearly detailed and there is less concern about the account being contested in the event of the trustee’s death.
When considering whether to set up an ITF or a formal trust, seek the assistance of legal counsel or a financial advisor for more information.
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How to set up an in-trust account
Setting up an in-trust account involves visiting your financial institution or speaking to your investment advisor to complete an account application.
Once the beneficiary reaches the legal age of majority, the trustee can have the account transferred directly to the beneficiary by working with the beneficiary’s investment advisor or the financial institution that set up the account. As Priest explains, the transfer should not be taxable because ownership isn’t truly changing.