Nancy Woods, adviser with RBCDeborah Baic/The Globe and Mail
Dear Nancy,
My wife and I just had our first daughter. I am from the UK and still getting accustomed to my new life in Canada. I am looking for effective ways to set up a nest egg for my daughter, which she will receive in her early 20s. I am in a good financial position and can put away $40,000 to $50,000 for her. I am looking for income generation as well as tax protection.
Do you happen to have any suggestions? I have a fairly active risk appetite and given how early in the game this is (she is 5 weeks old) so I can afford to take some chances. What are your thoughts? Signed, David
Dear David,
Congrats on your new addition. Having a child certainly raises many issues. You should make sure your will is reviewed and amended to take into account looking after your daughter. You are smart to use the power of time and compounding to help build a nest egg for her now. You can choose to put money into an RESP in one lump sum, (a scenario I covered in a previous column) or put the funds into an account and also contribute to an RESP each year.
You need to be aware that if you gift funds directly to her, since she is a minor there are the 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 I think is more suited to your situation, is that you can loan money to an inter vivos trust for her. That 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 1 per cent.
So, if for example you lend $50,000 to the trust, the trust has to pay to you each year by January 30 $500 in interest. The trust deducts the interest as an expense and you declare the $500 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 right now 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. This loan to trust strategy 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 daughter turns 21, I'm sure she will be ecstatic to receive a small fortune. At that time, the new worry will be teaching her how to handle her new wealth soundly.
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Nancy Woods, CIM, FCSI is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. To register your interest for an upcoming seminar, "What are the Questions Your Advisor is NOT Asking You?" visit her website nancywoods.com. To ask her a question, send an e-mail to asknancy@rbc.com.