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Thinking of Putting Money Away for a Minor Child?

Three Potential Pitfalls of an “In-Trust" Account, and How to Avoid Them

It’s not unusual for parents, grandparents or other loved ones to set aside money for the future benefit of a minor child. Whether it be cash gifts for birthdays, holidays or special occasions, or money intended for later education or housing costs, there are myriad reasons why a family member or close friend might hold money intended for the benefit of a child.

Typically, the person making (or sometimes receiving) the cash gifts for a minor child will set up a trust account at a bank to hold the funds until the child reaches adulthood and can manage the money on their own. While this type of arrangement is easily accomplished and fairly commonplace, there are important consequences of these “in-trust” accounts that you should consider before handing over a cheque or opening an account intended to benefit a minor.

What is an In-Trust Account?

In its most common form, an “in-trust” account is an arrangement usually made by a parent or grandparent to accumulate savings for a minor child or grandchild. The account is set up “in-trust” because the child is under the age of majority and cannot manage the money on their own. The adult who sets up the in-trust account (the “settlor”) also becomes the “trustee” of the minor’s money and is responsible for holding and/or investing the money for the child’s benefit.

Often, these accounts are set up informally with a financial institution and do not involve the drafting of any formal trust documentation by a lawyer. As a result, the well-meaning family member who establishes the in-trust account likely has not had the benefit of receiving any advice about the legal duties of being a trustee and implications of holding money in trust.

What is a Settlor and a Trustee?

The creation of a trust generally involves three parties: 

(1) the settlor, who creates the trust by gifting the money or property for the benefit of another person; 

(2) the beneficiary, who is the recipient of the gift from the settlor and benefits from the trust; and 

(3) the trustee, who is in charge of managing property for the benefit of the beneficiary. 

The property in the trust does not actually belong to the trustee; rather, the trustee is tasked with making decisions about how to manage, invest, and use the money or property in the trust for the sole benefit of the beneficiary. A trustee owes a fiduciary duty to the beneficiary, which means that he or she must make decisions for the benefit of the beneficiary and place the beneficiary’s interests ahead of his or her own at all times when managing the trust. A trustee must always act with honesty, care, and utmost good faith in carrying out these obligations. 

In the case of an informal trust set up at a financial institution, the settlor and the trustee are often the same person. When making a gift to a minor using an in-trust account, many settlors do not consider the duties and obligations that come along with the trust relationship or the practicalities of how the trust would best be managed until it is too late.  

Potential Pitfalls of an In-Trust Account

While simply creating an in-trust account with a financial institution is a relatively low maintenance and inexpensive way to create a trust for the benefit of a minor, below are some potential pitfalls that you should consider before you dismiss the idea of a formal trust document:

The beneficiary gets the money once they reach the age of majority. If your intention is to benefit minor children or grandchildren (or any other person under the age of majority) you should think carefully about when you would like that person to directly receive the money in the trust account. Without a deed of trust that says otherwise, at law, as soon as a minor beneficiary reaches the age of majority, they can require that the trust be wound up and all of the trust funds be distributed directly to them. This issue should be carefully considered as most settlors do not want a minor to have access to a large sum of money once they reach age eighteen. 

You cannot decide who gets the funds in the in-trust account if the beneficiary dies. If the minor dies before he or she reaches the age of majority, the funds in the trust belong to the minor’s estate. Minors cannot draft a will in Ontario, as a result, the minor’s estate will be distributed according to provincial laws of intestacy. 

Once you put money into an in-trust account with the intention to gift it to the beneficiary, the gift is permanent. The intention behind a trust account is that the money belongs to the beneficiary, who has rights to the money, but is not given the authority to manage it. When some settlors create an in-trust account, they think that they can take back the money whenever or if ever they need it. This is incorrect. Once the money is placed in the account in-trust for the minor, the settlor loses the ability to take the money back in the future.

The Solution

A properly drafted deed of trust can solve all of the problems that I have listed above and more. Although hiring a lawyer to draft a formal trust document may add some time and expense to establishing the trust account, it will give you much more flexibility in setting out how the trust should be managed, who should benefit and when, among other things. A properly drafted trust document can also save time, expense and headaches down the road as it can plan for a variety of different situations and circumstances to ensure that the intention of the settlor is properly carried out.


DISCLAIMER: Individuals should be aware that opening an in-trust account may give rise to tax implications.  Before opening an in-trust account or making gift to an in-trust account, you should consider obtaining tax advice from a qualified professional