4. Purchase a life insurance policy that benefits children or grandchildren, the proceeds going to a formal life insurance fund or the appointment of a trustee in insurance forms. Note that appointing a trustee on a simple form can lead to similar issues with escrow accounts. B s, such as giving the beneficiary full access and control over the funds when he reaches the age of majority, as well as a lack of control over the funds. ITF accounts are not formal escrow accounts. A formal trust requires the creation of highly specialized legal documentation created by a lawyer. Anyone interested in opening a formal trust with Franklin Templeton should speak to their advisor. But there is another tax rule that applies to trusts: Section 75(2) of our tax law ensures that all income and capital gains in the account are taxed in the hands of the contributor if the contributor is also the trustee or if the account was created in such a way that the assets can only be sold on the instructions of the contributor. To avoid this problem, it is best to appoint someone other than the contributor as the ITFA trustee. Since escrow accounts are informal and contain no legal documents, control of funds may disappear if one of the three people dies. Trust accounts are required for investments held by individuals under the age of majority (18 in Ontario) as children and youth are not legally permitted to open accounts in their own name. If the contributor dies during the creation of the ITF account, the allocation ends and all capital gains generated in the account are taxed in the hands of the beneficiary.
1. There are no guidelines on how these accounts should be managed. This places a heavy burden on the trustee to ensure that they manage the account prudently. If the beneficiary believes that the funds are not properly managed, the trustee may take legal action against the beneficiary. In this court case, the second wife created two ITF accounts for her late husband`s grandchildren. She had felt bad that the grandchildren were not mentioned in her grandfather`s will. The accounts were created with each grandchild to maintain the account at the age of 18. When the first grandchild turned 18, he received his account from the contributor. However, before the second grandchild turned 18, the contributor changed her mind and cashed out the account, using the money for her own family.
Subsequently, the court awarded the original beneficiary grandchild the amount of the account plus interest, on the grounds that the ITF account had been properly created, making the gift to the grandchild irrevocable. At this point, you may be thinking, “Wait a second, this sounds familiar to you. Doesn`t a trust work that way? And you`d be right. An escrow account is often referred to as an “informal” trust. The intention behind opening these accounts is to create an approval, but without the formal approval documentation required to create a formal approval. This means that your client can skip the payment of legal fees for the installation and simply note the relationship of trust they wish to establish in the investment contract by means of a “trust account” designation. Sounds pretty good, doesn`t it? Once beneficiaries are of age, accounts should be transferred exclusively in their name. If this is not the case, tax issues may arise; Interest, income and dividends will continue to be taxed on contributors` tax returns, which are likely to have a higher tax rate than beneficiaries. This transfer into the hands of the beneficiary is tax-free – it does not trigger a capital gains tax because beneficial ownership does not change. Two weeks ago, I shared an introduction to fiduciary accounts (ITFA). Today, I would like to end that conversation.
As a reminder, ITFAs are accounts opened by parents or grandparents for minor children, usually for the purpose of storing them for the child`s future. Funds can be used for any purpose. The intention is usually to save taxes by imposing as much income and growth in the account in the hands of the child. .