If an RESP subscriber dies, without proper planning the child beneficiary might never receive the assets.Pgiam/iStockPhoto / Getty Images
Parents and grandparents should include directions about registered education savings plans (RESPs) in their wills to ensure that child beneficiaries receive the benefits of the plan.
Assets in an RESP belong to a subscriber, which is the person or persons who open the plan and make contributions to it. When the beneficiary is enrolled in a qualifying post-secondary school, the subscriber can direct payments to them from the RESP.
If the subscriber dies before a child is enrolled in a qualifying program, the assets in the RESP belong to the subscriber’s estate to be divided among the residual beneficiaries according to the terms of the will (or provincial intestacy legislation, if no will exists). It means the child beneficiary might never receive the assets. (In contrast, it’s possible to name a beneficiary on a registered retirement savings plan who will receive the assets in the plan on death, and a beneficiary, or spouse or partner successor holder on a tax-free savings account.)
“If you don’t deal with [the RESP] separately in your will, then it’s just an asset like any other estate asset,” says Sara Kinnear, director of tax and estate planning at IG Wealth Management Inc. in Winnipeg.
That’s unlikely to be what a subscriber would have wanted when they established the plan, she says.
Maintaining an RESP after death
An RESP is a contract between the subscriber and the promoter (a financial institution). Typically, it’s not possible to name a substitute subscriber on the plan itself, and the terms of a contract might restrict the RESP’s transfer.
Having a joint subscriber is a simple option to ensure an RESP continues after a subscriber’s death. However, under the Income Tax Act, only spouses and common-law partners (or former spouses or partners, if both are legal parents of the child) can establish an RESP as joint subscribers.
In every province and territory outside Quebec, a joint subscriber takes over as sole subscriber if the other joint subscriber dies, allowing the RESP to continue. In Quebec, a joint subscriber’s share of an RESP forms part of their estate on death.
However, the recommended option is to name a successor subscriber in the will as it will ensure an RESP continues even if both joint subscribers die before the child is enrolled in a post-secondary program, says Paul Thorne, director of advanced planning with Sun Life Financial Inc. in Dartmouth, N.S.
However, once someone becomes a successor subscriber, they control the RESP and may withdraw assets from the plan for themselves or collapse it altogether, subject to potential taxes and repayment of government grants or bonds.
A subscriber may also leave directions in their will that their estate or a testamentary trust be the successor subscriber, with further instructions to the trustee as to future contributions or investment choices for the RESP.
However, there may be trust reporting obligations and costs associated with naming an estate or trust as the successor subscriber.
If a subscriber doesn’t include a provision for a successor subscriber in the will, or dies without a will, “there’s a good chance that RESP is going to have to be collapsed,” Mr. Thorne says. It may mean repaying government grants and paying taxes on investment growth in the plan before assets are distributed to estate beneficiaries.
When no successor is named
When no successor subscriber is named in a will, the beneficiaries of an estate can agree to name a successor subscriber, Ms. Kinnear says. However, all the beneficiaries would have to be adults (with capacity), she says, and reaching an agreement may not be easy.
For example, beneficiaries may disagree about whether or how the value of an RESP should count against what one beneficiary (or branch of their family) receives as part of the estate.
“One holdout [beneficiary] can just make it all fall apart,” she says.
RESPs and power of attorney
To address potential incapacity issues, RESP subscribers should also leave instructions for the plan in their power of attorney for property documents, Ms. Kinnear says.
“That would be in addition to your will,” she says. “Both of those documents should be updated.”
The instructions left in the power of attorney document should address future contributions, including whether the subscriber would like the child beneficiary to receive RESP contribution amounts in addition to educational assistance payments, which include grants, bonds and investment growth in the plan.