- A trust account set up for a beneficiary using a formal trust document that specifies how and when funds in the account can be used.
Saving for education
Formal “in trust” account
What it is:
Who can use it:
- Everyone – parents, grandparents, relatives, family friends.
Main advantages:
- The trust document specifies how assets held in the trust must be used.
- Investment income that remains in the trust is taxed within the trust each year.
- Withdrawal of income from the trust by a beneficiary age 18 or older is taxed in the beneficiary’s hands.
- There is no contribution limit.
- There are no age restrictions on beneficiaries.
- Many different types of assets can be held in the trust such as cash, stocks (including shares of a family business), bonds, mutual funds and real estate.
Potential limitations:
- A lawyer will be required to draft the trust document.
- Trustee fees may be required to manage the account.
- The trust must file a tax return each year
- Income-splitting tax may apply to dividends and certain capital gains earned within the trust.
Special considerations:
- Anyone can be named as a beneficiary, and there can be more than one beneficiary.
- Professional legal and tax advice is necessary to ensure the benefits of the trust outweigh the associated costs.