An in-trust account is set up with a financial institution to make investments for a minor, and has some distinct tax-saving advantages - making it an excellent vehicle to pay for a child's higher education.

Children can't enter into binding contracts. So the person who sets up an in-trust account is responsible for investing funds and signing the account contract on a child's behalf.

Quick Questions & Answers About In-Trust Accounts:

1. Why is an in-trust account a good way to save for a child's education?
   
   An in-trust account has at least three key benefits that make it an excellent savings vehicle for a child's education.
   
   First, unlike RESPs, no maximum limit applies to what can be contributed on an annual or total basis through an in-trust account. Second, also unlike an RESP, if the child does not go on to post-secondary education, the money may be used by the child for any other purpose.
   
   And finally, since there is generally no attribution of capital gains, an in-trust account may offer some tax-saving opportunities that can be very beneficial if you're saving for a child's education.
   
   Equity mutual funds realize most of their returns from capital gains; rather than dividends or interest. If you contribute to an in-trust account set up primarily to provide capital gains (either through distribution or disposition of assets) the resulting tax on capital gains, if any, may be paid by the child. And since a child will normally have a lower taxable income than an adult, less tax, if any, will be paid and more money will be available for the child's education expenses. The income (interest and dividends) generated by the mutual fund will be attributied and taxed in the hands of the donor.
   
   
2. Does the beneficiary have to be specified?
   
   Yes. If a beneficiary is not named on an in-trust account, one of the major criteria for establishing the in-trust relationship is missing. Without a beneficiary, you can't determine ownership or tax treatment of the account.
   
   
3. How is an in-trust account taxed?
   
   
   • All income (interest, dividends, foreign, and other income) is attributed to the donor if it was earned during a year in which the donor was resident in Canada. The donor must include this amount in his or her income and pay the related taxes.
   • If funds are provided solely from Child Tax Benefit payments or an inheritance, the income is taxed in hands of the child.
   • All capital gains on the account, whether from distributions from a mutual fund or sale of any assets in the account, may be taxed in the hands of the child.
   • The trustee is responsible for providing documentation of the source of the funds in an in-trust account and for ensuring appropriate income tax treatment.
   
   
4. What happens when non-cash assets are contributed to an in-trust account?
   
   If you contribute or transfer assets to an in-trust account, you are considered to have disposed of these assets at fair market value. If the market value of the transferred assets is greater than their original cost, the donor may be subject to capital gains tax. The trust would then be deemed to have acquired these assets at fair market value.
   
   
5. What if an unrelated party gives a gift to the in-trust account?
   
   If the donor deals at arm's length with a child (i.e., is generally not related to the child, neither an aunt nor an uncle), the attribution rules described here generally do not apply. Assets would still be transferred to the account as though the donor had sold them at fair market value and the donor may be taxed accordingly. However, all income and capital gains may be taxed in the hands of the child.
   
   
6. Can you take assets out of the account?
   
   Assets taken out of the account must be used for the child's benefit because the trustee manages, but is not entitled to, the benefit of the funds.
   

No Need to be Formal

An in-trust account is an informal trust because the only document that establishes the trust relationship is the investment contract containing the in-trust account designation. To be valid, an in-trust account requires:

A Donor

The person(s) giving a gift or contributing an asset to someone else. He or she is usually an adult relative.

A Beneficiary

The person(s) benefiting from the account's assets. He or she is usually a minor child. The beneficiary, not the donor or trustee, owns the assets.

A Trustee

The person who manages an account's assets on the beneficiary's behalf. The trustee manages the assets until the child reaches the age of majority; the trustee has legal control over the assets, but the child owns them.

Assets

Money or other assets contributed by the donor. In a trust relationship, someone manages assets for someone else.