Registered Education Savings Plans (“RESPs”) are a common tool for saving for your child’s post-secondary education. Under the RESP contract, the “subscriber” is the person or persons who have opened and contribute to the RESP. There may be a sole subscriber or joint subscribers. The “beneficiary” of a RESP is generally your child or your children (or your grandchildren, as the case may be).
A common misunderstanding that we hear from estate planning clients is that “when I die, the funds in my RESP automatically go to my children that the RESP was set up for”. This is not necessarily the case – the treatment of RESPs upon your death is more nuanced.
Assets that have a designated beneficiary (such as your spouse or your child) do not fall into your estate. It is common for people to designate a beneficiary for their Registered Retirement Savings Plan, Tax-Free Savings Accounts and/or life insurance. Rather than flowing through your estate, these types of assets pass directly into the hands of the designated beneficiary. This is not the case with RESPs, even though many people generally view their child or children to be the designated beneficiary or beneficiaries of the RESP.
All of this matters from an estate planning perspective. Generally, if there is no surviving joint subscriber to the RESP or if the Last Will and Testament is otherwise silent about the RESP, the RESP contract falls into the estate of the deceased subscriber. As a result, the value of the RESP would be distributed among the residuary beneficiaries of the estate (notwithstanding that it was likely the intention of the testator that the RESP continue to be available for the purpose of funding his or her children’s education). Practically, this typically means that the RESP will be liquidated and distributed to the residuary beneficiaries of the estate. Note, however, the residuary beneficiaries of the estate may not necessarily be the same beneficiaries of the RESP. Therefore, it is important to proactively deal with RESPs as part of your overall estate planning.
The definition of “subscriber” under the Income Tax Act (Canada) is broad enough so that your Will can allow your executor or other person to continue on as the subscriber under the RESP, or to contribute to the RESP on behalf of a beneficiary of the RESP. This enables the RESP to continue on past the death of the deceased subscriber for the benefit of the beneficiaries under the RESP. However, all of this is, of course, subject to the actual terms and conditions of the RESP contract. The RESP contract may have parameters around whether and how a successor subscriber is appointed, and who is allowed to be a successor subscriber.
Another important thing to keep in mind is that the RESP is an asset of the subscriber. This means, for example, that the subscriber is entitled to withdraw funds from the RESP. If your Will contemplates naming an individual to be a successor subscriber (and therefore to receive the rights of the subscriber under the RESP), it is important that your Will clearly indicates that such successor subscriber is to hold those rights in trust for the benefit of the beneficiaries of the RESP.
If the RESP is the subject matter of a trust, this creates another wrinkle to consider as part of your estate planning in relation to educational assistance payments (“EAPs”). An EAP is the amount paid to a beneficiary (i.e. a student) from the RESP to help fund post-secondary education. EAPs can only be paid to and for a student if one of the following situations applies: (1) the student is enrolled in a “qualifying educational program”; or (2) the student has attained the age of 16 years and is enrolled in a “specified educational program”. Circling back to estate planning, if a RESP is the subject matter of a trust, one thing to consider and address under the Will is what is to be done with any amounts remaining in the RESP if it is not exhausted by EAPs. This could arise, for example, if one or more of your children decided not to pursue post-secondary education. Further, if the testator’s intention is to benefit all of his or her children equally, this may be difficult if not all of the children are entitled to EAPs under the RESP.
All of the above boils down to a relatively simple question if you are the subscriber of a RESP: “Do you wish for the RESP to continue after your death?”. If you are seeing a lawyer for your estate planning, a good starting point is to:
- tell your lawyer about the existence of the RESP; and
- provide a copy of the RESP contract to your lawyer. From there, you can start exploring your options to ensure that the RESP asset fits within your overall estate planning objectives.
If you wish for the RESP to be continued following your death, in addition to appointing a successor subscriber, there are also a few other considerations that should be included in your Will. For example:
- Is the successor required or entitled to make further contributions, and if so, whether the amount is fixed or discretionary?
- Where are the funds to come from?
- Are changes to the beneficiaries permitted?
- Upon what terms can funds be withdrawn?
- What happens to the RESP funds in the event the RESP beneficiary fails to become eligible for withdrawal or passes away before all of the RESP funds have been withdrawn?
Conversely, if your wish is that the RESP is wound up following your death, then, at a minimum, the Will should address:
- Whether the contributions are to be withdrawn and distributed to the intended beneficiaries of the RESP or the beneficiaries of the estate, to what extent and at what time?
- Who is responsible for the tax consequences of the wind up?
One final piece of unsolicited advice, whether or not you are a subscriber to a RESP, it is always a good idea to get your estate planning in order. This may include your Will, Power of Attorney and Health Care Directive (or any combination of those three documents). No matter your adult age or your level of wealth, estate planning is important.
STEVENSON HOOD THORNTON BEAUBIER LLP
500-123 2nd Avenue S, Saskatoon, SK S7K 7E6
This article is provided for general informational purposes only and does not constitute legal or other professional advice.
This article was originally published in The Western Producer on June 23, 2022.