ITF’s Explained

In Trust For Accounts – Informal Trust for a Minor

 

An in-trust-for (ITF) account is a convenient way for parents and grandparents to invest for their children or grandchildren’s futures.  They can also be useful in settling inheritances, as minors are not permitted to directly accept a gift set out in a will, and setting up a formal Trust can be costly.

 

An ITF account is a non-registered investment vehicle set up under a trustee’s name with a minor named as an irrevocable beneficiary.  The trustee has the authority to make investment decisions and make withdrawals that benefit the minor at any time.  There is also the potential of splitting investment income (capital gains, dividends and interest) with the minor for tax purposes.  Once the minor reaches age of majority they are legally entitled to the assets and the account can be transferred into their sole name when the trustee deems fit.

 

What is an In-Trust-For Account?

A non-registered investment account set up by an adult for a minor to facilitate the gifting of assets intended for the minor’s future.  Funds withdrawn can be used for any purpose that benefits the beneficiary, as there are no limits on the amount or purpose withdrawals.

 

While the trustee maintains legal authority over the account during the beneficiary’s childhood, the minor child is the irrevocable beneficial owner of the assets.  The beneficiary is the only person entitled to receive the proceeds of any withdrawal or transfer.

 

Anyone who contributes to the ITF account irrevocably relinquishes ownership of the deposited funds to the beneficiary.

 

What are the benefits of setting up an In-Trust-For account?

 

An ITF account allows the account holder access to greater liquidity then other investment vehicles intended for minors, such an RESP’s or RDSP’s.   There are also no restrictions on how much you can contribute to these accounts in a given year or over the lifetime of the account.   If the beneficiary doesn’t purse a formal secondary education or requires funds for another purpose, an ITF account allows funds to be easily accessed to benefit the beneficiaries life style.

 

An ITF account can also be a valuable estate planning tool.  If the account is established prior to estate proceeding, the assets in the ITF account avoid probate taxes and can therefore be a helpful way to transfer funds tax-fee to a beneficiary.

 

How is the In-Trust-For Account set up?

 

The trustee will complete the custodian account forms, which will act as the binding agreement to name the minor as an irrevocable beneficiary and transfer the assets into their name.  The minor’s SIN number is required to open the account.

What happens when the minor reaches age of majority?

 

Once the beneficiary reaches the age of majority, he or she becomes legally entitled to the account.  It is expected that the trustee will work to have the account transferred directly into the beneficiary’s sole name.  The transfer is non-taxable and must be completed by the time the beneficiary turns 31.

 

How is an In-Trust-For Account taxed?

 

The trustee is responsible for filing tax returns for capital gains and income earned in an ITF account. Tax slips are issued with the trustee’s name and SIN, as well as the name of the beneficiary.  The tax slip clearly indicates that the account is registered in trust for a beneficiary.

 

The Income Tax Act applies attribution rules to the income in an ITF account.  Typically interest and dividends are taxed to the trustee and capital gains are taxes to the beneficiary. It is important that trustees work with tax specialists to fully understand the implications of holding an ITF account, and ensure tax filing is done accurately.

Why set up an In-Trust-For account rather than a formal Trust?

 

A formal Trust requires a legal Trust Deed be created and executed.  If you wish to avoid the legal costs in setting up a formal Trust, an In-Trust-For account may be a great solution.

 

What are the drawbacks of setting up an In-Trust-For account?

As the minor becomes legally entitled to the ITF assets upon reaching age of majority, some may find it a drawback that they don’t have formal control over when the funds are withdrawn or how the funds are used.

 

In extreme cases, the beneficiary may take legal action if the trustee declines to give him or her access to the funds at the age of majority.

The level of control the trustee wants to assert over the spending or conservation of the assets following the minor reaching age of majority, may determine if this type of account is suitable.  These accounts might be appropriate for smaller amounts of money that the contributor is comfortable with the minor receiving at the age of majority.

 

What are some alternatives to an In-Trust-For account?

1. RESP Contributions
2. RDSP Contributions
3. Life Insurance Policy
4. Informal gifting
5. TFSA Contributions