Jack and Katja Yip wanted to help their child avoid financial stress a little later in life, so they started saving for daughter Kelly when she was a newborn.

The couple considered a registered education savings plan but it didn’t seem like the right tool for what they wanted.

“Part of it was, the government only recognized certain schools and colleges. So we avoided that, just for that reason,” recalls Mr. Yip, who works with an engineering firm.

Instead, they opened an in-trust account for Kelly, now 17. As she grew up, the option seemed to be working so well that her parents decided do the same thing for her brothers Michael, 15, and Shawn, 13. RESPs are a lot more flexible today than they used to be, but advisers can recommend other affordable and more open-ended choices for couples who want to save for their children. These include in-trust accounts and exempt life insurance policies, each sometimes in conjunction with RESPs.

“I believe that every financial service is viable if it fits the situation,” says Earle Yasin, the Yip family’s financial planner.

Saving in trust
Not to be confused with a formal trust (a more legally elaborate and expensive vehicle), an in-trust account lets a parent save and invest on behalf of a child until he or she reaches adulthood. Arrangements can be made at most financial institutions so that an account is opened with the expressed intent that the parent is holding it in trust for a single child. It’s best if the aims are clearly identified in a written document, advisers say; if you’re concerned about the content, it’s wise to consult a lawyer.

In the case of the Yip family, every time the children’s grandparents gave them money for birthdays or other events (about $250 a year per child), the parents directed the cash into each child’s separate in-trust account. The Yips did the same with the child-tax credits they have received over the years, and could also have deposited some of Kelly’s own earnings, such as from babysitting. Of course, parents themselves can also contribute to a child’s account.

“Part of it was, that it was their money,” Mr. Yip says, explaining the appeal of setting up an account for each child. “Because they weren’t old enough to handle it themselves, that’s why we put in trust.” The key difference between saving in-trust for your child and setting up an RESP is that the child has guaranteed access to the cash when he or she reaches adulthood. The money does not have to be used for schooling but could instead go toward travel or buying a car or home.

Mr. Yip and his wife like the freedom associated with in-trust saving, and they have included their children in their talks with Mr. Yasin about the accounts.

“We sit down as a group. We talk about basic financial strategy,” explains Mr. Yasin, adding that this year the children themselves chose to invest some of the assets in mutual funds.

The other reason the Yips opened in-trust accounts is that they didn’t want to incur taxes on monetary gifts to their children. For tax purposes, the assets in an in-trust account are attributable to the owner of the account — the child. Just as importantly, when any capital gains are realized, those will also be attributed to the children.

“Chances are, they aren’t paying tax because they’re in the tax-free zone, which is about $9,000,” explains Dave Christianson, a financial planner with Wellington West Total Wealth Management in Winnipeg.

The one exception, advisers say, is that interest and dividends are attributable back to the parents — but even that’s avoidable by investing in mutual funds without distributions.

RESPs
The main advantage of a registered education savings plan is that the federal government will top up your annual contribution by 20 per cent, to a maximum of $400 for each beneficiary a year, to a maximum of $7,200. That’s free cash that is hard to pass up, advisers say.

The catch is that the full value of an RESP is only available to your child if he or she attends an approved college or university and uses the proceeds to fund education-related costs. If your child doesn’t hit the books, you have to pay back the federal grant.

Still, in many cases financial advisers prefer RESPs to saving in-trust.

“You can open a family RESP so you don’t have to worry about which children go to university,” notes Adrian Mastracci, president of KCM Wealth Management Inc. in Vancouver.

Advisers argue that RESP rules offer a strong incentive for children to pursue more formal education – an innate good, perhaps – and that there’s not much to lose.

“If nobody in the family goes [to college or university], you can always take some of it and put it into your RRSP, given you have room,” adds Mr. Mastracci. “Worst scenario: you’re going to pay tax on the capital gains that you’ve accumulated over the years.”

Perhaps most importantly, the parent retains control of the investment and keeps it out of the hands of young adults who may not be ready for the responsibility.

“For a lot of parents, at age 19, it’s a pretty big stash to all of the sudden be going into the child’s hands,” Mr. Mastracci says of an RESP account.

He says that a single-family RESP is easier to manage than an in-trust account for each child, for which the parent will need to file taxes.

Exempt life insurance
A third option for parents who want to save for their child’s future is to buy so-called exempt life insurance policies.

Designed specifically as a living benefit, these policies split the death benefit from an inside savings account, which parents can transfer to a child at any time after the child turns 16. As with in-trust saving, the child can withdraw cash from the policy for whatever reason. When money is withdrawn, a taxable gain is triggered, Mr. Yasin said.

Both Mr. Yasin and Mr. Mastracci say the insurance option is their least favourite way of saving money for a child, because it involves paying premiums on a life insurance policy that probably won’t be needed.

“There isn’t a huge risk on the life of a child,” says Mr. Mastracci. “So if you don’t need the life insurance, then look for an easier savings element with maybe the RESP or in-trust account.” Special to The Globe and Mail