How In-Trust Accounts Work

We often hear of “in-trust” bank accounts established at banks and brokerage houses. What are in-trust accounts and how are they used?

An in-trust account is an informal trust that you can create at a bank or investment dealer of your choice on behalf of a minor. The bank account is established because a minor is not allowed to accept gifts under a will or enter into binding financial contracts. An adult then assumes responsibility for investing funds on the child’s behalf.

Parents and grandparents typically establish these informal in-trust bank accounts to save money for the child’s education or other purposes. The bank accounts and brokerage accounts can be funded with gifts, birthday money, the Child Tax Benefit (CTB), or inheritances not governed by a testamentary trust.

Note that an informal trust account does not have a trust deed formally establishing the donor, trustee, and beneficiaries. Often the only information is the data provided on the name of the account (i.e. ITF or “In Trust For…”). To ensure the account is treated properly under law, draw up a document indicating the beneficiaries, donors, and and trustees and states that you are permanently giving assets to the trust.

Tax Implications of Informal In-Trust Accounts

Any income (interest or dividends) earned in an in-trust account set up for a related minor child (children, grand children, nieces and nephews) will be taxed in your hands. There are a few exceptions where the income is taxed in the child’s hands such as when the funds are from the CTB or an inheritance.

Capital gains may be taxed in the child’s hands if the account is structured properly. If the contributions are for a minor and produce mainly capital gains, the capital gains are taxed in the child’s hands.

If you are planning on establishing an in-trust bank account or brokerage account, consult a professional who can help you structure your account to minimize your taxes.

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