We will be experiencing a Christmas season this year like none other in most of our lifetimes. This year will require creative thinking in many aspects and for some this includes the gifts given to children, grandchildren, nieces, or nephews. We have identified five financial gift ideas to help build for the future: RESPs, “In Trust” Mutual Fund Accounts, RDSPs, Life Insurance, and Critical Illness Insurance.
It is worth reviewing the financial vehicles that can be effective, long-lasting gifts. They may not get the immediate reaction the latest PS5 will, but that unit will become obsolete while these financial gift keeps on giving.
5 Financial Gift Ideas
Registered Education Savings Plan (RESPs)
Post-secondary education is more important now than ever before. An RESP provides a vehicle where education savings can be accumulated for one child or siblings as beneficiaries.
Government grant money is paid on the first $2,500 contributed annually. The grant is paid on 20% of contributions, to a maximum of $7,200 in grant money per beneficiary over the life of the RESP or to age 17, whichever comes first. Special conditions apply regarding grant money paid when beneficiaries are 16 or 17.
A “Subscriber” is the person opening the RESP plan.
The Subscriber to the RESP does not have to be a parent: it could be a grandparent, aunt, uncle, a friend – anybody. While a grandparent can certainly be a plan subscriber, it may be advisable for grandparents to provide the gifted money to the parents (for the parents to be the plan subscribers) to avoid potential complications in estate settlement.
“In Trust” Mutual Fund Accounts
An “in trust” mutual fund account is one where there is a contributor and a specified beneficiary – typically a minor. It is simple to set up and does not require trust documentation to be drawn up by a lawyer.
Though it is a simple set up, the tax advantages will only be realized when the contributor respects the trust and truly separates themselves from the money contributed to the plan. These plans work well either when RESP contributions have been maximized or where the contributor does not want any restrictions on how the money can be used.
With “in trust” mutual fund accounts, any interest or dividend income earned is taxed to the contributor, while capital gains are taxed to the beneficiary. Accordingly, such plans work best when the investments grow primarily through capital gains.
Registered Disability Savings Plans (RDSPs)
An RDSP is a registered savings vehicle available to people who qualify for the Disability Tax Credit (DTC), subject to certain age restrictions and lifetime contribution limits.
The eligible person is the plan beneficiary and may also be the “holder” of the plan if they are 18 or older. In many ways, an RDSP operates similar to an RESP, because government grants are paid on contributions made up to certain dollar and age limits. The dollar limits are based either on family income levels or the income of the beneficiary.
From a gifting perspective, the important point to note is that anybody could contribute to an RDSP, provided that written consent is obtained from the holder of the plan. There can only be one RDSP opened for anyone beneficiary at a given time.
It sounds gloomy, particularly during Covid, to be speaking about life insurance for someone with their entire life ahead of them.
But that is exactly the point: a child has yet to develop the health concerns that could render them uninsurable as an adult. Life insurance for a child is inexpensive and the accumulating cash values on permanent life insurance policies provide not only protection in the event of death, but also a fund that can be drawn upon to deal with life events.
Critical Illness Insurance
Critical Illness Insurance pays out the face value to the policy owner when the insured is diagnosed with one of the covered critical conditions and survives the diagnosis by a given number of days – 30 is the most typical.
The number of conditions covered has grown considerably over the years: many policies cover from 15 to 25 conditions. More importantly, a Critical Illness policy issued for a child will generally also cover child-specific illnesses such as cystic fibrosis.
As you can see, many financial gift ideas can provide growth or protection – or both at the same time in the case of vehicles such as permanent life insurance. These are not gifts Santa would put in his sack – but Santa will be challenged this year too and will thank you for making his sack lighter.
Talk to your Scrivens advisor to see if financial gift ideas make sense for you and make the Covid Christmas one to remember for the recipient!