Saving for education

Formal “in trust” account

What it is:

  • 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.
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Who can use it:

  • Everyone – parents, grandparents, relatives, family friends.
Small boy at a desk thinking

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.
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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.
College students on stairway

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.