By STUART KIRK
We often find ourselves wondering how we can build a nest egg for the next generation. One way to do this is to put money into an RESP in one lump or contribute to an RESP each year. The limitation of an RESP is that cash must be used for education although the grants received by government are attractive.
One needs to be aware that if you gift funds directly to a child, if they are minors, there are tax attribution rules. Any income that is received by those funds is attributed back to you and you pay the necessary tax.
Another interesting solution, which might be more suited to certain situations, is that you can loan money to an inter vivos trust for the child. An inter vivos trust is a living trust set up while you are alive. This would mean that you set up a loan to the trust to fund it. The interest rate for the loan is set by a government prescribed rate, which right now is an exceptionally low rate of one per cent.
So, if for example you lend $10,000 to the trust, the trust has to pay to you each year by Jan. 30 $100 in interest. The trust deducts the interest as an expense and you declare the $100 as interest income. In the meantime any income or growth is declared by the trust.
An inter vivos trust can only run for 21 years. At that time it must be closed down and the loan repaid. The remaining assets are then paid to the beneficiary. The beauty of the loan currently is that the interest rate is fixed for the time of the loan. When the prescribed interest rate changes, it does not impact any existing loans. In the future, you can also loan more funds to the trust if you wish. The key point of this loan to trust strategy is that it avoids the attribution of income back to you.
This is a strategy that is often used to loan to a lower income spouse and referred to as a “spousal loan.” It can also be used for lending to a trust.
Because of the small nuances and complexity, it is best that you have a professional help you set it up. They will help you ensure that the interest payment is made before the deadline and everything is clearly documented for the taxman.
When your child or grandchild eventually gets the cash they will more than likely be ecstatic to receive a small fortune. Now just teach them how to spend or invest it wisely. Please remember to always consult your investment advisor before taking any action.
Stuart Kirk is a Wealth Advisor with Precision Wealth Management Ltd. The opinions expressed are those of the author and may not necessarily reflect those of Precision Wealth Management Ltd. For comments or questions Stuart can be reached at www.precisionwealth.ca, stuart@precisionwealth.ca or 250-954-0247.
