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RESPs make valuable gifts for grandchildren

by Deborah Leahy

If you’re a grandparent, you already know the pleasures of having grandchildren in your life. And like so many grandparents, you may be looking at ways to help your grandchildren get the most out of their lives.

Perhaps the most valuable thing you could give to your grandkids is the gift of education. Consider this: Over a lifetime, post-secondary graduates earn, on average, about $1 million more than those without a degree, according to the Census Bureau.

Furthermore, your grandchildren may well need help, because getting an education is expensive and costs continue to rise. You might want to contribute to an RESP.

You have several options for how the money can be invested and contribution limits were increased when the new federal budget was introduced. All withdrawals are free from federal income taxes, provided the money is used for qualified education expenses.

If you name one grandchild as a beneficiary of an RESP and that grandchild decides not to go to college or university, you can switch the account to another grandchild—in other words, you maintain control of the money for the life of the account.

Another common way to invest money for a grandchild’s education is through the use of an “in trust” account, an informal trust because there is no deed.

Once gifted, this money no longer belongs to the donor.

If you put money into a formal trust or an in-trust account for a minor grandchild, you will be responsible for tax on the income until the child reaches age 18. Any capital gains will be taxed to the child regardless of their age.

This is why investments that generate capital gains are ideally suited to this type of arrangement.

Care must be taken to ensure that the in-trust account is set up properly and complies with the applicable tax rules.

Whichever option is right for your family, there are a variety of opportunities for you to give something to the grandchildren who give so much to you.

Deborah Leahy is an investment adviser with Edward Jones, member Canadian Investor Protection Fund.

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