RESPs - Not just an end of year issue
For those of us with young children (or perhaps, not so young children), one of the many things that may be on our “to do” lists before December 31st is to contribute to a Registered Education Savings Plan (“RESP”).
As most of us know, RESPs allow for tax-efficient savings for a child’s post-secondary education. There are two types of RESPs: a family plan RESP or an individual plan RESP. With a family plan, a subscriber can name one or more child as a beneficiary, with the requirement that each beneficiary be related by blood or adoption to the subscriber. In an individual plan, only one child can be named as a beneficiary, and there is no requirement that the beneficiary be related to the subscriber. In addition to other incentives, when a subscriber contributes money to an RESP, the federal government will deposit an additional amount – the Canada Education Savings Grant (“CESG”) – equal to 20% of the contribution up to certain limits. The maximum CESG each year is $500 (equal to 20% of a contribution of $2,500) and the lifetime CESG limit is $7,200. A subscriber can contribute any amount to an RESP, subject to a lifetime contribution limit of $50,000 per beneficiary. Contributions can be made to an RESP for up to 31 years, and an RESP can remain open for a maximum of 35 years.
However, what most of us do not know is what happens to an RESP on the death of the subscriber. The answer depends largely on the terms of the subscriber’s Will, if any, and on the terms of the RESP contractual agreement.
Unlike an RRSP, RRIF, or a TFSA, the proceeds of an RESP do not flow outside of the subscriber’s Estate into the hands of a designated beneficiary. Regardless of who is named as the beneficiary of an RESP, the RESP forms part of the subscriber’s Estate, and should be administered in accordance with the Will, if any, or the laws of intestacy.
While the subscriber is alive, ownership and control of the RESP remains with the subscriber. An individual and his or her spouse may be joint subscribers of an RESP. Where there are joint subscribers, in the event that one subscriber dies, the surviving spouse will become the sole subscriber. In the event that the sole subscriber dies, the subscriber’s Estate becomes the subscriber.
A subscriber of an RESP should therefore give consideration to whether it is prudent to include directions in his or her Will naming a successor subscriber (if the RESP is to be continued), and how the RESP is to be dealt with (e.g., how the RESP will be funded and invested, whether there are to be limits on withdrawals, etc.). It is also prudent for joint subscribers to agree on how the RESP is to be dealt with on the second of their deaths and whether they wish to have mirror RESP clauses in both of their Wills.
If the RESP is not subject to a specific direction in the Will or there is no Will, an executor will have to make some difficult and complicated decisions respecting whether the RESP can be maintained or whether the funds in the RESP must otherwise form part of the residue of the Estate. For a thorough discussion respecting options for an executor dealing with an RESP where no direction is provided in a Will, I suggest Anne Werker’s article “Death, Taxes and Registered Education Savings Plans” (Hull & Hull Probater, May 2004).
Thanks for reading,
Saman M. Jaffery
