Registered education savings plans (“RESPs”) are a very popular tax-deferred way to save for a child or grandchild’s post-secondary education. However, many people who have established RESPs have not planned for what would happen if they pass away before the beneficiary has used the RESP assets.
Often a lack of estate planning results in the unintended consequence of the RESP having to be terminated and the assets forming part of the deceased’s estate, rather than continuing to be available for the purpose of the education of the intended beneficiary. There is a common misconception that RESPs are treated the same as RRSPs upon death, and that the assets of the plan will transfer directly to a named beneficiary. However, RESP assets belong to the person who set up the RESP (the “subscriber”), and upon death, will transfer to a joint subscriber (usually a spouse), if one has been appointed, or, if not, to the subscriber’s estate to be distributed as per the terms of the Will.
The simplest way to avoid this is for the subscriber to appoint a successor subscriber in his or her Will. This enables the successor subscriber to preserve and continue the RESP for the intended purpose and benefit of the RESP beneficiary. If there is no joint subscriber or appointed successor subscriber, your Executor’s only option may be to terminate the RESP. When the assets of an RESP are terminated, all contributions are refunded to the estate of the person who set up the RESP (the “subscriber”), and will be subject to probate fees and potential creditor claims. Any Canada Education Savings Grants (“CESGs”), which are government grants of up to $500 per year paid into the RESP for an eligible child, which have not been paid out, will be refunded to the government.
If you have RESPs for your children or grandchildren it is very important to sit down with an estate planning professional to review the RESP contract to determine the rights it gives and the obligations it creates. For example, you should investigate whether or not it permits the subscriber to name a successor subscriber, and if so, whether the successor subscriber must make a contribution to the RESP in order to assume the full rights of the subscriber. Your RESP contract may already provide that your Executor will become the successor subscriber. Once you have these facts in hand, you can update your Will to ensure that your children or grandchildren will receive the full intended benefit of your carefully planned RESP.
photo credit: Balancing The Account By Hand via photopin (license)
