Are "in trust for" bank accounts really trusts?

Many parents and grandparents set up accounts at a bank to save money for their child or grandchild. They set up the accounts as being "in trust for" (or, ITF) the child or grandchild. These accounts are popular, largely because the set-up is so simple. The idea is that the parent or grandparent puts money in the account, which grows until the child or grandchild reaches the age of majority and receives the funds.

But are these accounts really trusts? And if they are, what does that mean for the parent or grandparent who contributes the money? And what does it mean for the child?

Yes, these accounts are trusts. They may not seem like it, given that there is no deed, will or other document drawn up by a lawyer. Because of this, ITF accounts are known as informal trusts, but they are still trusts.

The basic nature of a trust is that money is held by a trustee (in this case the parent or grandparent) on behalf of a beneficiary (in this case a child or grandchild). Because it's a trust, the money can only be used for the beneficiary. The trustee has a legal obligation to do this. The trust is irrevocable, meaning that the contributing parent or grandparent can't change his or her mind after the account is set up and take the money back out for their own use.

If the child named as the beneficiary reaches the age of majority, he or she will receive the full amount of the funds and any interest earned on the funds. If the child doesn't reach the age of majority, the funds in the ITF account do NOT automatically go back to the parent or grandparent. The funds fall into the child's estate. Odds are good that the child won't have a will, since he or she is under the age of majority. In that case, the funds would be distributed according to the law of intestacy in the province where the child or grandchild lives.

As an example, Ian's grandmother sets up an ITF account for Ian to receive when he turns 18 years old. Unfortunately Ian is killed in an accident when he is 16 years old. He doesn't have a will. The ITF account becomes part of Ian's estate, which according to the law of intestacy goes to his parents. The parents receive the ITF funds.

Make sure you mention any ITF accounts you've set up for your children or grandchildren when  you meet with your estate-planning lawyer.