Don’t forget about RESPs in your estate plan

A Registered Education Savings Plan (RESP) is a popular investment vehicle to help save for a child’s or grandchild’s post-secondary education. However, when it comes to estate planning, RESP assets are often overlooked.

Here is an overview of important estate planning considerations for your RESP.

Key benefits

RESPs offer three key benefits:

1. Income-tax deferral: income earned inside the plan is ‘sheltered’ and is not subject to annual taxation.
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.
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. There are also provincial grants that an eligible child may receive.

Many parents/grandparents fail to think about what will happen to the plan should they (the subscriber) die before the plan’s assets have been fully withdrawn in the form of educational assistance payments (EAPs).

Unlike an RRSP or RRIF, assets in an RESP are considered part of the deceased’s estate, even though a beneficiary has been named. This means probate fees are payable, and the assets may be exposed to creditors of the estate. In addition, any government grants may have to be repaid from the plan.

Planning options

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.

An Estate and Trust Consultant at Scotiatrust can help you with your Will and estate planning needs.