Having recently had my second child, strategies to help secure a child’s financial future have been on my mind. Here are some of the steps we took as a family to help set our child up for success.
One of the first things we did after arriving home from the hospital (aside from trying to get some sleep) was apply for our child’s Social Insurance Number. That’s the first important step to take, as it will allow you to proceed with the following options.
Looking at your new baby, it’s hard to imagine that they will be attending university or college in the next 20 years. But opening a Registered Education Savings Plan (RESP) when they are young is the best way to ensure that the cost of their education is accounted for.
The primary benefit of having an RESP account is that the government will match 20 per cent of your contributions to the account, up to $2,500 a year. That is potentially an extra $500 per year that can go towards your child’s education. The government will continue to match 20 per cent of your contribution annually until you have received a lifetime limit of $7,200 in grant money, so opening the RESP early allows the power of compound interest to take effect. For example, assuming a four per cent rate of return, if you contribute $208 per month when your child is born and stop the contributions once the government grant is maximized in 15 years, the RESP account would be valued at close to $63,000 by the time your baby is ready to start post-secondary education.
Insurance can also be helpful. Although you may have adequate life insurance coverage for your children through your benefits at work, you may want to consider taking out a small life insurance policy, which would have a guaranteed insurability rider. This would allow your child to increase their insurance coverage throughout their life, without having to prove insurability. While it’s hard to think about something happening to your new baby that may impact their future insurability, insurance is one of those things you hope to never have to use. So by purchasing the guaranteed insurability rider, you could help protect your child’s future family at a relatively low cost today. Of course, I would highly recommend discussing any potential insurance decisions with a qualified insurance specialist.
If you are a business owner who may have a liquidity event in the future, it may also be beneficial to have a family trust be a part owner of your business. While the majority of the tax benefits of the family trust have now been eliminated, each member of the family may still be able to take advantage of the Lifetime Capital Gains Exemption. When each member of your family qualifies for the exemption, the tax savings on the disposition of a company could be well worth the cost of setting up the family trust and restricting the ownership. If you’re considering this option, ensure you discuss it in more detail with a qualified accountant.
This information is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. This article is supplied by Michael Dickie, a financial planner with RBC Dominion Securities Inc. Member–Canadian Investor Protection Fund. Insurance products are offered through RBC Wealth Management Financial Services Inc. (“RBC WMFS”), a subsidiary of RBC Dominion Securities Inc.* RBC WMFS is licensed as a financial services firm in the province of Quebec. RBC Dominion Securities Inc., RBC WMFS and Royal Bank of Canada are separate corporate entities which are affiliated.
*Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. and RBC WMFS are member companies of RBC Wealth Management, a business segment of Royal Bank of Canada. ® / ™ Trademark(s) of Royal Bank of Canada. Used under licence. © 2019 RBC Dominion Securities Inc. All rights reserved.
Livingston MacDonald Wealth Management helps young professionals with $200,000 or more of investment assets articulate and execute smart financial plans. Visit LivingstonMacDonaldwealthmanagement.com.
