Last week, Mr. and Mrs. Kid of Qualicum dropped by to discuss how they could save and invest money for her three children. She wanted to set up an education fund for their children but were unsure of the best way to go about it. We discussed the RESP program (Registered Education Savings Plans). If the funds were to be used for school then a family plan RESP was the best way to go.
Under a family plan Mr. and Mrs. Kid can name all three children under one family. Since they have three children of different ages treating them equal is important. The RESP plan also kicks in a 20% government grant on the amount that is contributed to the plan with a limit of $400 grant per child per year. So the money can compound faster and Mr. and Mrs. Kid dont have to pay tax each year on the growth of the plan.
They also wanted to know if there were any other options. What if one doesnt go on to do any post secondary education? A simple in trust account can be set up for each child under 18. The funds can be used for purposes other than education without penalty should the child not attend post secondary education. If set up properly, the trust money can be spread among various children in varying amounts at different times when the needs are presented. Mr. and Mrs. Kid did not want to be responsible for paying the tax on the growth of these accounts every year otherwise she would just give the money to the kids now.
We established an in trust account using corporate tax class investment funds. Since interest and dividend income will be payable by Mr. and Mrs. Kid and capital gains can be deferred to the child, the funds we set up will generate capital gains. Mr. and Mrs. Kid did not know that we can hold safe money market instruments or bonds inside a capital class fund and have the in trust accounts safely invested while generating capital gains.
At the end of our discussion, they decided to invest two thirds into an RESP and one third into an in trust account for maximum flexibility. Mr. and Mrs. Kid wanted a simple yet flexible and tax efficient plan to save for the childrens education as well as future plans such as a home or business opportunity.