Financial Focus
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Funding Your Grandchildren's Education

One of the best gifts a grandparent can give a grandchild is helping to pay for a university or college education.

If you're a grandparent considering helping out with education expenses, make sure you choose the right vehicle for your contribution. This will help the money you put toward education grow faster, as well as minimize taxation.

Contributing to a Registered Education Savings Plan (RESP) for your grandchild is the best approach. But depending on the circumstances, there may be other options worth exploring.

When it comes to an RESP, a grandparent can open up a plan with the child as a beneficiary. However, because the parents may already have an RESP for their child, it may make more sense to contribute to an existing plan.

If parents don't make full contributions each year, there is an opportunity for grandparents to make up the difference. Not only will this help maximize the level of annual contributions, it will ensure the RESP is eligible for the maximum Canada Education Savings Grant (CESG) of up to $500 a year.

A grandparent can gift money to the child's parents, who can then make the contribution on their behalf. And doing it this way can eliminate the confusion that having more than one RESP for a child can create.

If grandparents do open a separate RESP for a child, they need to exercise caution. If parents and grandparents have plans, total contributions need to be carefully monitored to ensure the allowed maximums are not exceeded.

Another concern for grandparents opening an RESP is the possibility that the child will not further his or her education. Under certain circumstances the growth of the funds in the RESP can be transferred back to the contributor's Registered Retirement Savings Plan (RRSP) if a child doesn't go to college or university. But a grandparent may be beyond RRSP age, and funds cannot be transferred to a Registered Retirement Income Fund (RRIF). This means returned amounts could be heavily taxed.

Grandparents can also open a family RESP, through which they can name their grandchildren as beneficiaries. If one or more children choose not to attend a post-secondary institution, other grandchildren can use the money, up to certain maximums.

If there is no available contribution room in a child's RESP, grandparents may want to consider an in-trust account. This is a type of informal trust set up to allow an adult to manage funds on behalf of a child. When the child reaches the age of majority, he or she takes control of the funds in the trust.

An in-trust account, which can be set up at a financial institution, is a good way to contribute amounts beyond those allowed by an RESP. There are no contribution limits, although unlike an RESP there is no tax deferral. However, if set up correctly, taxes can be managed by having capital gains taxed in the hands of a child-whose tax liabilities will be non-existent or small.

There are some potential disadvantages. The donor is taxed on interest and dividends earned in the plan. Once the child has control of the money it can be used for any purpose-not just education. And an in-trust account does not qualify for the CESG.

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Funding Your Grandchildren's Education

Short /Radio version:

Are you a grandparent who wants to help out with your grandchild's education costs?

Contributing to a Registered Education Savings Plan for your grandchild is the best approach. But caution may be in order.

For one thing, the child's parents may have already opened an RESP. Starting another one can complicate the issue. In this case it may be best to gift money to the child's parents, who will then contribute to an existing RESP.

If you decide to open a separate plan for a grandchild, make sure total contributions to all plans don't exceed allowed limits for the child. And be aware that if the child doesn't attend a post-secondary institution, you could run into tax problems. Under certain circumstances the growth in the plan can be rolled into an RRSP as a contribution, but grandparents may be past RRSP age.

This is (FA name), your Edward Jones advisor.

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