An "in trust for," or ITF, account is a non-registered plan that investment firms offer to allow an individual to save money on behalf of a child. A parent, grandparent, aunt, uncle or someone else can use an ITF account for many purposes. For instance, an ITF account in combination with a registered education savings plan (RESPs) might ensure a child has the cash she will need to attend college.
How Does an ITF Work?
An adult – a person who has reached the age of majority (AOM) – creates an ITF account as a means to place assets in trust for a minor, which is anyone who is not yet legally recognized to be an adult.
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A trusted adult serves as the trustee of the ITF account and is the sole account holder until the child becomes an adult. In turn, the named child is the account's irrevocable beneficiary, a person who, once named, can't be removed from the account. The single asset held in an ITF account is cash.
Unlike a formal trust account, the ITF account does not require an attorney to draft highly specialized legal documentation. Anyone interested in opening an ITF account can do so by working directly with an investment firm.
Who Is the ITF Beneficiary?
The creator of an ITF account can name any minor as the account's beneficiary. An ITF account can have neither multiple beneficiaries nor contingent beneficiaries. This is true regardless of the number of people who contribute cash to the account.
Who Owns the ITF account?
A named minor child is named the "beneficial owner" of the ITF account assets from the moment the account is created. All account donors irrevocably relinquish ownership of and entitlement to any funds they contribute to the account to the account's beneficiary
Who Manages an ITF Account?
When an ITF account is created, the creator names a trusted adult to serve as the account's trustee – the account's legal authority – until the beneficiary reaches adulthood.
The trustee holds the account for the benefit of the minor and has signing authority over the account. This arrangement allows the trustee to act as a fiduciary, meaning that the person is legally required to manage the assets in the account prudently and in the best interest of the account's beneficiary.
Effect of Beneficiary Reaching Maturity
Once a beneficiary reaches the age of majority (AOM), she does not automatically replace the trustee as the account holder of record. Instead, at that time, the beneficiary inherits the same authority over the account as that of the trustee.
Consequently, once the beneficiary is an adult, both she and the trustee share the management of the account. This arrangement allows each one to issue instructions pertaining to the account and its assets independent of the other. Redemption and transfer proceeds, however, may only be payable directly to the beneficiary.
When the beneficiary reaches the age of majority, the trustee arranges for the account to the transferred to the beneficiary. The formal transfer of the account is not a taxable event in that the ownership of the assets in the account remains unchanged; the beneficiary was always and remains the owner of those assets. The transfer is, however, the legal event that must take place for the beneficiary to be the sole authority over the account.
If an adult beneficiary issues an instruction related to the account independently of the trustee, the investment firm will transfer the account into the beneficiary's name to ensure appropriate tax and account activity reporting.