RESPs & estates

RESPs make for estate challenges

July 24, 2015

It’s a good time to be reviewing your estate plans.  No, I don’t mean that summer is the right time, necessarily, but recent changes to the tax rules on testamentary trusts and estates that take effect January 1 mean that 2015 is the year to review strategies. 

Next month, we will review those overall strategies and how they have changed. Today, we will tackle one of the biggest challenges in estate planning, and that is successfully passing on Registered Education Savings Plans, or RESP’s.

Other registered plans, such as RRSPs, RRIFs and TFSAs, allow a plan owner to name a beneficiary.  That’s the person or people who would receive the assets in the plan on the death of the owner, who is called the “annuitant” in the case of RRSPs and RRIFs.

The beneficiary could also be the estate of the annuitant, either by actually declaring “Estate” as beneficiary on the plan, or by default, if no beneficiary is named.

RESP’s are different. They do not allow for a beneficiary to be named in the event of death of the “subscriber” of the plan. That can cause serious complications.

First, let’s look at the unfortunate jargon that is applied to RESP’s. First, there is no owner, but a “subscriber”. That’s the person who sets up the plan and often, but not necessarily, the one who contributes.

Spouses can be joint subscribers. This is strongly advised as an estate planning technique, as the surviving joint owner takes over if one dies.

Typically, the subscriber is the parent, parents or grandparent of the child or children that the plan is meant to benefit. The government will pay a Canada Education Savings Grant (CESG) of 20% of the first $2,500 contributed per child per year. This is paid in cash into the plan.

Technically, the subscriber and contributor can be different people, but I’m going to ignore that distinction for our purposes.

The children who are designated to receive the benefit of the RESP in the future are the ones who are called the “beneficiaries.”  But, for estate planning purposes, this means something completely different than the beneficiary designation on a registered plan or a life insurance policy.

In the event that the subscriber dies, there is no change of status with the beneficiary child. However, there is also no automatic or universal method through which the de facto ownership of the plan transfers. The Income Tax Act does not prescribe or determine who has the legal right to the plan on the death of the subscriber. 

Different RESP plans have different rules. Therefore, the best method is to name a successor subscriber in your Will.

In the absence of such a designation, the assets of the RESP will fall into the estate, come under the jurisdiction of the executors and may have to be collapsed. This would lose the benefit for the beneficiaries (unless they are also the beneficiaries of the Will and the estate), and compel a return of the grant money to the government. Growth of the plan would also be taxable to the estate.

Those are bad outcomes.

Therefore, if you are the subscriber of an RESP, consider first changing the subscriber designation to joint, if you have a spouse. Then, since both of you could pass away, it’s still a good idea to have the designation of successor subscriber named in your Will.

This can be done quite simply by preparing a Codicil (an addendum) to your Will, rather than preparing a whole new Will.

A grandparent can name the child’s parents (or even another person) as successor.

It is clearly your intention that the children should ultimately benefit from the plan. Make sure that will still take place, even if the worst happens.

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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.

Please consult legal, tax, insurance and investment experts for advice on your unique situation.

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David Christianson, BA, CFP, R.F.P., TEP, CIMis a financial planner and advisor with Christianson Wealth Advisors, a Vice President with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.