For some people, a future for their grandchildren means having job security. For others, it means having property. But as any economist can tell you, the most secure future is adaptable. So, if you hope your grandchildren will have whatever future they can dream of, a smart way to do that is with a trust fund.
It is not always easy to set up trust funds for grandchildren in Canada, but it can be one of the best ways to leave them a secure future.
The typical trust fund is straightforward in terms of its legality and liabilities. A trust is a three-way agreement between a settlor (the provider of the money involved in the fund), a trustee (the person who manages that money), and a beneficiary (the person who receives the money). In most cases, the settlor is a corporation that a grandparent owns, while the trustee is the grandparent. The beneficiary is always the grandchild in this scenario.
The interesting thing about trust funds is that they do not need a “founding document” in the same way a corporation does. That means that it is not a legal entity with any liability. It does, however, have to pay taxes as if it were a person. That is where trusts can get a little complicated, so if you would like to have an extraordinarily profitable or well-protected trust, it is suggested to seek out the support of a lawyer.
The basics of a trust are that once the settlor gives the trustee an amount of money, the trustee then uses investments, mutual funds, and other methods of moving money to turn that amount of money into a more considerable amount. In short, a trust fund is a lot like a hedge fund, but instead of using the money of investors, it uses the capital of a settlor, and instead of paying a board of directors, it pays the beneficiary. Trust funds are usually set up by people over 50 and are most valuable when you turn 65. Seasons Retirement Communities has tips for taking care of yourself well into retirement.
If you plan to serve as trustee yourself, a little structure goes a long way. Open a dedicated chequing account and an investment account titled in the trust’s name. Keep all receipts and statements in a simple binder, and record every decision in a dated log. This creates a clear paper trail and makes annual tax filing more straightforward.
Set practical boundaries for requests. For example, you might decide that routine education costs can be approved by you alone, while significant one-time expenses require a short written request from your grandchild or their parent. A simple system keeps conversations warm and reduces misunderstandings.
Plan for continuity. Name a successor trustee in the trust deed and in your Will, choose someone who can step in if you are travelling or become unable to act. Let that person know where to find documents, account numbers, and your general philosophy for using the funds. A one-page letter of wishes, stored with the deed, is often enough to express your values without making new legal commitments.
In Canada, there are two types of trust funds for grandchildren: living trusts and testamentary trusts. A living trust is set up while the trustee is still alive. To increase its value, the settlor can either contribute more or invest the trust fund’s money in a manner that yields returns.
Many subtypes of living trusts revolve around how the trustee gets money from the settlor and what money the trustee gives back to the settlor. This is necessary for the trust fund to remain minimally taxed.
Testamentary trusts are trusts included in a will. These are used to establish how much money is left to a child or grandchild after the trustee’s death. These used to be taxed far less, but changes in Canadian tax law have rendered them of equal value to a beneficiary as a living trust. This is all to say that neither a living trust nor a testamentary trust is better or worse.
Trust funds for grandchildren in Canada are taxed like they are people, but that means they can also receive tax breaks like they are people. Depending on how the trust’s money is handled, they can end up being untaxed or making a profit from the tax code. For instance, you can establish a living trust known as an “Alter Ego Trust,” allowing the settlor to receive income from the trust. Contrast this to a basic trust, through which the payment of the trust remains in the trust. Income within a trust can be taxed, but if that income goes to the settlor, it is not, since it is the settlor’s money, to begin with.
Cash is the easiest starting point, but many grandparents also transfer listed securities, GICs, or name the trust as the beneficiary of a life insurance policy. If you prefer simplicity, consider a balanced mutual fund or ETF, then review the allocation once a year. Keep trust assets separate from your personal holdings since mixing accounts creates avoidable tax and accounting issues.
As trustee, you decide timing and purpose, within the rules you set. Many grandparents use staged support, for example, a modest monthly amount for living costs while the grandchild is in school, plus larger payments tied to milestones like tuition, training fees or a first apartment. Another practical approach is matching your grandchild’s savings for specific goals. This encourages good habits and keeps the trust focused on opportunity rather than unlimited spending.
Do not pay personal bills from the trust, even by accident, and avoid lending trust money to yourself or another family member. Keep instructions concrete, such as listing what qualifies as education, housing or health expenses, so you are not making the rules up each time a request arrives. Finally, schedule a quick annual check-in with your grandchild, review progress toward goals, and update your notes. Small routines prevent big headaches.
How does this differ from an RESP in Canada? Read on to learn more about the differences.
In Canada, there is a program you can set up for your grandchild called a Registered Education Savings Plan (or an RESP). This type of untaxed savings account is a great way to provide money for your grandchild once they become an adult. There is a limit on the RESP of $50,000, and the child can only access it once they enroll in higher education. However, once they enroll in higher education, the entire sum of money opens up for them.
The critical thing about RESPs is that they can be used similarly to trusts. For instance, say you invest a portion of an RESP into a stock or bond. That stock or bond grows in value, and you receive a return. If that return causes the RESP to exceed $50,000 in value, the excess money must go to a savings account. And when it does, it goes there untaxed.
Not only that, but an RESP for grandchildren can receive tax breaks that result in a tax refund. Once the RESP turns a profit, that untaxed money can be used in any way the savings account holder wants. If they use it for a charitable cause, that charity turns into a tax credit, usually more significant than the sum contributed.
A trust works best alongside other accounts. If your grandchild has, or will soon have, a Tax-Free Savings Account, consider timing distributions so they can contribute and learn to invest their own money. If a disability is part of the picture, explore a Registered Disability Savings Plan and coordinate trust support around government grant windows. Some families also keep a small in-trust-for account at a bank for incidental gifts, then use the formal trust for larger, planned goals. Aligning these tools ensures your trust supports, rather than replaces, your grandchild’s own efforts.
Yes, any relative of the RESP recipient can contribute to it directly and tax-free. This is why these sorts of funds have become the go-to for many grandparents. They are easy to set up, hard to tax, and quickly turn into much more considerable sums of money than their $50,000 limit indicates. Just be sure to speak with a lawyer, an accountant, or both about setting one up, as they have to be set up at either a bank or an institute of higher education.
The RESP rules for grandparents are the same for the parents, as anyone in a child’s family can contribute to an RESP.
Write down three things: your purpose for the trust, the kinds of expenses you want to support, and how you will decide. Create a short spending framework, for example, routine education costs up to a set amount, technology or tools that support learning, and housing support that is tied to enrolment or training.
Open dedicated trust accounts, set up simple record keeping, and put a reminder in your calendar to review investments and notes once a year. Add a one-page letter of wishes that explains your hopes for the trust, such as finishing school without heavy debt or saving steadily toward first-home costs.
Name a successor trustee and let them know where the documents are stored. Share the broad plan with your grandchild or their parent so expectations are clear. With these basics in place, serving as trustee remains manageable, and the trust becomes a steady, encouraging presence in your grandchild’s life.
Setting up a trust fund for your grandchild is not only a financial decision but also a lasting gift of care, guidance and opportunity. With thoughtful planning and clear boundaries, you can create a resource that grows alongside your grandchild and supports them in meaningful ways. By taking the time now to structure the trust well, you help ensure their future remains secure, flexible and full of possibility. Please ensure that you seek the expert advice and guidance of an experienced financial advisor.
