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If your child does not go to university, your contributions are returned to you tax-free. But when it comes to the grant money and income in the plan, you have a few options.
If you have a family plan, the grant money can go to another child (provided it doesn't put him over the $7,200 maximum) or be returned to the government.
As for the income, you can it move to your RRSP provided you have the contribution room. "If you have to take the income out as cash, you will incur a 20-percent charge as well as have to declare it as income, and pay tax at your marginal rate," says Benson.
Scholarship trusts
If you invest in a scholarship trust, you still qualify for the CESG but you don't get to choose your investments. Instead, you buy units in the plan, usually directed by a foundation, which invests in conservative holdings, such as bonds and mortgages. The younger your child, the cheaper the units are to buy. Some scholarship trusts won't accept new clients if the child is older than 12.
When your child heads off to college, your contributions are returned to you with the idea that you'll use them to fund the first year of expenses. For the following three years, you get a scholarship payout based on the number of units you bought and the value of each unit that particular year. The foundation's actuary determines the unit's annual value.
Ten years ago, Dan Bortolotti, of Toronto, opened a scholarship trust for his newborn daughter, Jaimie. Since then, he has contributed $61.90 a month into the plan. "The main drawback with the scholarship is the lack of flexibility," he says. That's why when his son, Erick, was born seven years ago, Bortolotti opened a self-directed RESP through his bank.
"When Jaimie was a few years old, I had some savings bonds that came due. It wasn't much, about $1,000 or so, and I wanted to deposit that money into her RESP," he says. "I wasn't allowed to do that. You can't make lump sum contributions."
He could have increased the total number of units he held for Jaimie, but he didn't want to increase his monthly payments.
At one point Bortolotti considered stopping his contributions to the scholarship, but discovered that while he'd get back his contributions in full, he would be charged $100 per unit to get out of the plan. All together, it would have cost him $1,000. With a self-directed plan, you can stop your contributions at any time for free.
The scholarship option comes with one major benefit over self-directed plans: life insurance. "If either I or my wife dies, the plan matures automatically without any more payments being made," says Bortolotti.
Still there are other pitfalls with scholarships: With many of them, kids must pursue continuous study. If they take any time off, they forfeit all or part of the plan's money.
Trust funds
There are two kinds of trust funds: informal and formal. The first is more common and easier to set up; you can do it through most banks and financial advisors. Formal trusts, called "inter vivos trusts," require a designated trustee, separate from the contributor, as well as a lawyer. No trust fund is eligible for the CESG.
Mastracci prefers RESPs to trusts for a few other reasons. "Trusts can't be family trusts, you have to open individual plans for each child," he says. "And there's no tax deferral. If the trust earns interest or dividends, you pay tax on it."
And perhaps the most important difference: When your child hits the age of majority, the assets in the trust are hers to spend however she wants. Can you say Lincoln Navigator? How about breast implants? No matter how distasteful your child's choice, it's hers to make.
With an RESP, you determine how much they get and for what purpose --tuition of course, but will you allow funds to be diverted to dorm living or would you prefer your child live at home and save some bucks, for example?
With RESPs, the money must be spent on education, but you are in control. With trust funds, your children get that control before they are old enough to drink legally in the United States.
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