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young money

Owen Charters and his two sons Isaac,12, and Elliott, 8, in their Toronto home on Aug 30, 2021. He has set up trust accounts for Isaac and Elliott as he helps them learn about investing.Fred Lum/The Globe and Mail

Three years ago, William Brown of Fort St. John, B.C., then age 12, started asking his aunt and mom about stocks, bonds, mutual funds and compounding interest. He liked the idea of investing and he wanted in. But because he hadn’t reached the age of majority, opening an investment account in his own name was out of the question.

So his mom, Teresa Brown, came up with a solution: If he could prove himself with fictional trades on an online phantom account for a year, she would open a Wealthsimple account and he could use it. He’d just have to run the trades by her first.

He tripled their first $200 investment right out of the gate. Now 15 and in high school, William is allowed to make any trade he wants from his phone using his mom’s account. Notifications on her own phone keep Ms. Brown in the loop.

Fred Masters, a financial literacy expert in Kitchener, Ont., who works with high school and university students, isn’t surprised that families such as the Browns cobble together solutions allowing their teens to invest using parents’ accounts.

“There’s an insatiable, growing appetite amongst our teens and young adults to learn more about money,” he says, pointing to survey results from the Canadian Foundation for Economic Education indicating that investing is one of the top topics youth want to learn more about.

And no wonder. With soaring student loans, mortgages and personal debt looming on their horizon, finding ways to make more cash is top of mind. “Now add the fact that technology has opened the door to instantaneous stock trading on your phone from anywhere ... and it’s easy to understand the kind of Reddit-fuelled, frenzied trading that we saw earlier this year,” Mr. Masters says.

Yet passing over complete control of an investing account to their children might not sit right with many parents. Fortunately, there’s a more palatable option to help those who would prefer to stay in the driver’s seat during their kids’ childhood and teen years: Open an in-trust account, an informal trust used by adults so they can invest funds on behalf of a minor.

In-trust accounts

Allison Marshall, vice-president of high-net-worth planning services for RBC Wealth Management in Toronto, says in-trust accounts (sometimes called informal trusts) are often used by parents and grandparents who want their children or grandchildren to get a head start on investing.

Like a registered education savings plan, an in-trust account is opened at a financial institution. But unlike an RESP it can be used to pay for pretty much anything once the child hits the age of majority. Also, there’s no maximum, as there is with an RESP.

In some instances, this is a good thing. Maybe a family has already maxed out the RESP lifetime contribution limit of $50,000 but, after scanning university costs these days, wants to save even more. Or the family wants things to be fair. Why should the university-bound son get money for school, but the socially minded daughter helping to build schools in Central America gets nothing?

In-trust accounts are also much easier to open than formal trusts, and don’t require initial or continuing legal fees.

Then there’s the potential tax benefits. Generally, all income is attributed back to the donor – the parent or grandparent – and must be included in their income and taxed accordingly. However, there are exceptions. If the funds come from Canada Child Benefit payments, or the child’s inheritance, then the child pays the tax – presumably at a much lower rate.

The same goes for any money earned by the child from a part-time or summer job. Their money, their tax.

“Sometimes informal trusts can be for income-splitting purposes,” Ms. Marshall concedes, but more often adults open them just so the children can learn about risk and return.

The Goldilocks zone

There is a sweet spot, size-wise, when it comes to in-trust accounts. At least, that’s what Owen Charters, who heads a national charity in Toronto, discovered when he tried to open one for his two boys, ages 8 and 12.

Doing his homework, he found that many do-it-yourself investing platforms required a $1,000 minimum. On one hand, that minimum made buying a handful of Apple Inc. (AAPL) shares, the boys’ top pick, actually doable. On the other, he wasn’t sure he wanted to hand over a thousand bucks to his kids.

“It was a threshold that was a little bit high” for what Mr. Charters thought children of those ages should be playing with.

Marvin Schmidt, founder and senior wealth strategist of Schmidt Investment Group at CIBC Private Wealth Management in Edmonton, says some advisers and institutions will open an in-trust account for a client with a lower minimum. But that usually requires having an existing relationship. The last thing advisers want? “A million $300 accounts sent our way,” he says.

Besides, who wants to tangle with the Canada Revenue Agency over $300? There are tax filing requirements and reporting obligations for these accounts, along with the associated costs if an accountant is brought in. And parents need to keep meticulous records about where the money originally came from.

At the same time, in-trust accounts aren’t meant for extra large sums of money either, says Ms. Marshall of RBC. The legal requirements and paperwork are much less onerous than for formal trusts, so informal accounts are better for smaller financial goals. In fact, if a parent, or child, makes some savvy or lucky investment decisions and the account grows too large, the CRA might want to determine where the money originally came from and if all the supporting documentation is in order. That’s a headache many parents don’t need.

The RESP alternative

Once an in-trust account is set up, it belongs to the child. Period. There’s no way to give the money back to the original donor, even if Grandma’s roof has caved in and she could have used her investment for repairs. What’s more, once children reach the age of majority (which varies by province), they can wind up the trust, take the money and run. It’s theirs. Many young adults would act responsibly, but there’s no guarantee.

It’s one of the reasons that Mr. Masters, the financial literacy expert, prefers that parents use an RESP instead when investing with their kids. Parents have more control over the money when their child reaches the age of majority. Besides, RESPs help kids reach an important financial milestone: a diploma or degree.

“RESPs incentivize the kids in terms of getting that postsecondary qualification, which is so important to thrive financially,” he says. “The dollars are there for that purpose, and it’s an important purpose.”

Mr. Schmidt is teaching his own kids to invest too, but he’s not using in-trust accounts. He wants to retain control longer. He invested $5,000 on his twins’ first birthday in 2009, and vowed never to touch it. They’ve known about the shares since they were age 5 or 6 and can watch the assets balloon and shrink.

“They’ve been following the companies and it’s working very well,” he says.

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