A Registered Education Savings Plan (RESP) is a popular investment vehicle to help save for a child’s or grandchild’s post-secondary education. They are popular because they offer a few key benefits such as:
1) Income-tax deferral: Income earned inside the plan is ‘sheltered’ and is not subject to annual taxation. The income is instead included in the beneficiary’s taxable income when the money is eventually taken out to fund the beneficiary’s post-secondary education. With available education tuition tax credits and typically lower taxable income, this often results in little to no taxes payable (which is perfect for income splitting).
2) Income-splitting opportunities: When withdrawals are made, income inside the RESP is taxed in the hands of the beneficiary (the student), who is typically in a low tax bracket, as opposed to in the hands of the subscriber, who is typically in a higher tax bracket.
3) Government grants: Under the Canada Educational Savings Grant (CESG) program, the federal government will pay up to $500 each year that contributions are made for an eligible child, up to a per child maximum of $7,200. There are also provincial grants that an eligible child may receive. If there is any unused grant room from a previous year, the maximum annual CESG can be up to $1,000.
When it comes to estate planning, RESP assets are often overlooked. Many parents and grandparents (the subscriber) fail to think about what will happen to the plan should they pass away before the plan’s assets have been fully withdrawn in the form of educational assistance payments (EAPs). RESPs have a 35-year life span, and contributions can be made for 31 years from the time the account is opened. Since RESPs can remain open for so many years, it’s important the subscriber factors them into their estate plan.
Unlike other registered accounts such as a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF) or Tax-Free Savings Account (TFSA), assets in an RESP are considered part of the deceased’s estate, even though a beneficiary has been named. If there is no surviving co-subscriber, or successor subscriber named in the will, the value of the RESP becomes part of the estate. This means probate fees are payable (approximately 1.4 per cent), and the beneficiary will need to wait until probate has been granted. In addition, any government grants may have to be repaid from the RESP and the assets may be exposed to creditors of the estate.
Another factor to consider is the RESP funds may not be distributed in accordance with your intentions. For example, if an individual’s estate was left in equal parts to two children, the RESP would be split 50-50 through the will. However, if one child had already attended post-secondary school and used their share of the RESP, the other child would not receive their full share.
There are a few steps that can be taken to ensure the RESP is readily accessible, is not subject to probate or grant repayment, and can be distributed in accordance with your wishes. Here is an overview of important estate planning considerations for your RESP.
Name a successor subscriber
If the subscriber’s will contains no instructions about the RESP, the assets will form part of the residue of the estate and will be handled according to the terms of the will. In most cases, the only option may be to terminate the plan, resulting in all contributions being refunded to the subscriber’s estate. All CESGs (but not the accumulated income on the CESGs) that have not been paid out as EAPs must be refunded to the government. The subscriber’s estate may also face tax on accumulated income (but not on the original contributions).
This result (the plan’s collapse) is not what most subscribers intended or would want. Therefore, the better option is for the subscriber to specifically deal with the RESP in their will by naming a successor subscriber. If the subscriber dies, the appointed successor subscriber will have the authority to preserve and continue the plan on behalf of the beneficiary.
Sole (or last) subscriber grandparents may wish to consider naming the beneficiary’s parent as the successor subscriber. It may also be possible to establish a testamentary trust — with sufficient assets to continue making contributions — as successor subscriber for the plan.
Open the plan with co-subscribers
When we first meet with parents or grandparents who are wanting to set up an RESP, one of the first things we discuss is how RESPs can be open in sole name (single subscriber) or in joint name (co-subscriber).
If there are two parents or two grandparents, we almost always recommend opening the RESP with co-subscribers, unless there are blended family considerations. With co-subscribers, on the passing of one co-subscriber, the RESP becomes the property of the surviving co-subscriber. On the last surviving co-subscriber’s death, the RESP then becomes part of that individual’s estate and is to be distributed based on the terms of their Will.
Because of this, we also typically recommend a clause be included in a couple’s mirror Wills that specifies what to do with the RESP on the final passing (such as naming a successor subscriber).
Different RESP subscriber and contributor
In some instances, grandparents wish to open an RESP for their grandchildren, but they may find their health deteriorating, or they are getting on in age. If it makes sense, we provide the suggestion that the parents could be the subscriber/co-subscriber and the grandparents fund the contributions to the RESP.
This achieves the goal that the grandparents are funding their grandchildren’s future post-secondary education, while reducing the estate risk given the subscriber is younger. When this approach is used, the parents are the subscribers, not the grandparents. This means that the parents ultimately control the account and have the ability to withdraw money from the account at any time, and control future withdrawals.
Power of Attorney
When having your will updated to include the RESP assets, we would also recommend updating your Power of Attorney document to include details of how to administer any RESPs you open. That way, if you become incapacitated, your Power of Attorney will still have the authority to make RESP contributions to the plan, and initiate withdrawals when the time comes for the beneficiary to attend post-secondary school.
Keep your Portfolio Manager informed
As you can see, it’s important to have an estate plan in place for any RESP you are the subscriber for. Another important component is ensuring that your Portfolio Manager is kept up to date on any changes to your will and power of attorney documents. This is information that we obtain for all our clients for a number of reasons.
The first, is if a client pass away, we know who their executor is, and what their wishes were for the RESP. Secondly, should a client become incapacitated, we know their wishes for the RESP, and who their power of attorney is. Upon receipt of the power of attorney document and doctor’s note, we can administer the RESP with direction from the power of attorney. Lastly, we want to ensure that at every stage the investment objectives, risk tolerance and time horizon align.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138. greenardgroup.com