This article is brought to you by insurance for children, Canada’s leader in financial planning for children and creator of Child Plan ™ the fastest growing alternative to the RESP. Child Plan, One Plan For Life.
Gifts for Babies
When is the right time to set up a financial gift for a baby’s future?
A new baby in the family often means it’s time to rush off to the nearest toy or clothing store to search for baby clothes, electronic toys, baby rattles, a stroller, a baby seat, it all adds up.
But these are short-term gifts that are quickly disposed of, not long-term gifts that will make a difference in their lives. Instead of handing them toys, they won’t play with for very long, what about contributing to their financial futures?
This is an ideal time to begin thinking long-term. For parents, it’s time to think about their child’s future?
Financial gifts for babies can be especially valuable because the money can grow for decades. Cash can help the parents now, but other gifts can help the kids with their financial futures. Even a small gift now can make a significant difference by the time they go on to post-secondary education, a deposit on their first home, or business, etc.
More importantly, what will they need for their education and what ideas can you come up with now that will help them follow their dreams? When you start thinking about a baby’s financial gift, it makes sense to consider all your options.
Keep in mind that sometimes, grandparents and other family members (and perhaps even friends) may also be thinking the same thing. Grandparents especially want to spoil their grandchildren, but are now often asking, why do we have to wait 30 years to give a gift that will help them in life?
Financial Gifts for kids
Perhaps you want to make a more substantial long-term gift for the baby, one that has a long-term focus and that you can be sure will still be available when the child becomes an adult. And there are more than just post-secondary education costs to consider if you are serious about setting up your child or children for a financially sound future.
Before deciding how much of a financial gift to set up for your child or grandchild’s future, you should consider the type of investing strategy it’s going to be.
While a financial gift can be a variety of many kinds of investment vehicles, it’s important to first know and understand what structure you can insert these investment options into to transfer their tax effectively later on in life to your child or grandchild.
Savings Bonds
Until the 1970s, parents and grandparents used to gift government Savings Bonds to newborns, called a Certificated Bond.
Savings Bonds were a government IOU. Like all Bonds, they worked like a bank term deposit but over longer terms. You received a yearly payment of interest, and at the end of the term, you got back the final years’ interest, plus the original sum you invested.
However, these were stopped some time ago when it became easier for the government to sell them to hedge funds and became less valuable as interest rates fell.
When researching financial gifts, please don’t get confused between a Canada savings bond and a Canada learning bond. You’ll see a lot of marketing for Canada learning bonds, however, the Canada learning bond is a subsidy from the Canadian government to parents of low-income households to help them save for their children’s future education.
The Canada Learning Bond (CLB) is part of a Registered Education Savings Plan (RESP). It’s a subsidy paid to low-income families with an income below $47,000 a year. You receive up to $2,000 of free money over 15 years for your child, but only if you have an RESP account.
You will receive the money even if you never make any deposits into the Child’s RESP. The child will get $500 in year 1, and then $100 annually is deposited into the RESP without any deposit required.
Of course, payments stop if your income rises above $47,000.
The Canada Education Savings Program: 2020 Annual Statistical Review showed almost 41.9% of eligible children applied for the CLB in 2020. This implies that almost 42% of children with an RESP account live in households with an income below $48,000 per year.
Savings Account
Another option that many parents want to establish for their children is a bank savings account. It’s important to understand that a bank savings account, while it can be opened in the name of a child, does not belong to the child until they have reached the age of 18.
Again it’s important for parents to note that if you plan to begin regularly saving money use a savings account as a way to save for their future, please remember at the age of 18 the child has complete authority to withdraw all the funds out of the savings account without your permission. So before you open a savings account, ask the bank teller or the mutual fund salesperson who will control this account when my child turns 18 to avoid unpleasant surprises.
Please remember if the information is power then education is empowerment. It is your responsibility to make sure you have all the information before making any decisions.
Most savings accounts for children are designed to meet their needs until they turn 18 or the age of the majority in their province.
If you do plan to open a bank savings account for your child, make sure that the account has no monthly fee and allows a reasonable number of transactions per month for free.
Also, make sure it pays interest so that your child can watch their balance grow and earn additional interest payments. Be sure to use bank accounts as a way to teach personal finance skills and how they can manage their own money.
Can I Transfer Real Estate or Company Shares to my Child When They are Babies?
While real estate is the main investment asset of many Canadians and many families own their businesses, it is important to note that children under 18 in Canada can not own any shares of companies or real estate.
If you plan to transfer real estate to them that you invested in when they were babies when they turn 18, the government will view that as a disposition of the real estate, in other words, you sold it. And you’ll be required to pay the capital gains tax on the growth of that real estate before transferring it to your child. It’s also important to remember that any real estate that you transfer to your child after they turn 18 is susceptible and exposed if any future marriage may not work out.
If you plan to transfer the shares of your company to your child when they are under the age of 18 it’s important to consult a lawyer and accountant as children under age 18 can’t own company shares.
Another option that is available to parents of means, is to establish a formal trust and transfer financial assets such as real estate and company shares into the trust. Again, seek advice from a lawyer and an accountant to create the proper structure and minimize the taxes.
Child Plan TM is a formal insurance trust that can be set up for children as early as 14 days after their birth and which does not only grow tax-free from the day that you open it but there are no taxes to be paid at any time during the child’s life on either the dividend, the cash value and even when you transfer it to them as adults.
How to Start Investing in Their Future
Investing in your child’s future is now more complicated and complex than ever before. Do you open a savings account for your child, an investment account for your child, and RESP for your child, do you invest in stocks and cryptocurrency for them?
When considering where and how to invest for your baby, you must get all the information to make the best-informed decision.
With levels of financial knowledge remaining extremely low in Canada, opening up a savings or investment account for a child as soon as possible after birth makes good sense. Over time, having the account can help your child to learn about the responsibilities of handling money, and set them up for a sound financial future.
The huge advantage of starting young and making regular contributions takes advantage of two of the most powerful concepts of modern portfolio theory. Those concepts are the time value of money and the power of compound interest.
Simply put, the longer your money is left in any investment, the more it will grow in value because of the more interest it will earn. Then if you do not withdraw the interest earned, you begin earning interest on the interest!
This works even better if you make regular contributions over the long term too.
While an investment and savings account can help with your child’s needs in their early years from everyday purchases. You should also consider a long term investment both for their imminent education needs as well as their life beyond education.
One of the main reasons that many parents are now setting up long term investments for their children, which they can’t tap into until they reach the age of majority and even start their own family, is because parents today in Canada are giving their adult children on average of over $500 per month just to help them with household expenses. In addition, in 2021 parents in Canada gave their children over $10 billion to help them purchase their first homes.
In other words, if you fail to plan today for their future then you may be responsible for financially assisting them when they’re adults. Child Plan TM is a participating whole life plan which can be opened for babies as early as 14 days after birth.
Child Plan TM is a tax-free investment in which you don’t even need a social insurance number for your child to open a plan for them.
One of the many features and benefits of a Child Plan TM participating whole life plan is that from the day that you open it your child receives a tax-free annual dividend for life and not just at the age of 18. The cash value of their Child Plan TM is not only growing at a compounding rate without any volatility in a tax shelter but it’s also completely shielded from any volatility in the stock market.
This makes Child Plan TM a great vehicle to meet your child’s financial goals.
One of the best features of Child Plan TM is that on the day that your child comes to you and they need to access their plan for their education or for another path they choose, the cash value hasn’t declined at all if the stock markets are currently volatile.
In addition, your child can use their Child Plan TM cash value for their education, their first home or anything in life and from anywhere in the world, not only from Canada.
Undoubtedly, this has to be the best gift you can give to a child: financial security and peace of mind.
To see how much cash value your child’s Child Plan TM will grow over time, request a personalized illustration.
To learn more about Child Plan ™, please visit insuranceforchildren.ca.
FAQs
What type of financial gifts can I give my child?
You can start a bank savings account or investment account.
Some of these have more investment risk than others, and you would need to monitor the financial gift until the child is mature enough to operate the investment themselves.
Child Plan TM is an investment you could start as a financial gift for a baby or at any time up to age 18. Dividends are accumulated each year and added to the value of the investment. The cash value can be used for any purpose and in the event of your child’s death at any time, the Life Insurance payment would be significantly larger than the cash value.
What type of accounts can I open for my child when they are babies?
Bank savings accounts, an RESP, or a Child Plan TM.
You can’t give investments, you need to open an account somewhere first then buy the investments, is that correct?
You do need to open the accounts answered in the previous question.
There are no gift taxes in Canada, so you can gift any sort of investment to a child. This could include stocks, bonds, or property, though in most cases you need a lump sum of money to purchase those investments.
Child Plan TM can be started with small regular contributions. Once the child turns 18 they can become the owner of the plan. Either one of you can continue to make contributions or stop contributing. The cash value continues to grow, and after 20 years Child Plan TM becomes self-funding. No further contributions are required.
Who pays the taxes on the investments until my child is 18?
You do!
Income earned in children’s savings and investment accounts counts as income for you if you are making the contributions.
Child Plan TM is nontaxable throughout the lifetime of the plan. Neither you nor your child ever has to pay tax on any of the earnings.
Who controls the accounts once my child turns 18?
With a savings or an investment account as well as an RESP, once your child turns 18 they have full control and authority to do with the funds as they wish. With a child plan, you have full control of the plan and the cash value until the day you feel that your child is mature enough to handle the investment and the cash value. The plan will not transfer automatically to the child at age 18 as is the case with a bank account, an investment account, or an RESP.
In addition with a Child Plan TM, you can even maintain control of the cash value within the plan even after transferring it to your child. Unlike a bank savings account or an investment account for a minor in Canada which is an informal trust, Child Plan TM is a participating whole life plan in a formal insurance trust.
