RESPs – Wrinkles and Warts

Summary: RESPs – How to deal with an RESP on a subscriber’s death

As we know, a Registered Education Savings Plan (“RESP”) can be a good vehicle to help parents set aside funds for their children’s post-secondary education in Canada, mainly because a parent can contribute up to a maximum of $50,000.00 for each child that is named as a beneficiary in a RESP and because of the Canada Education Savings Grant and other government incentives creating a source of tax deferred income. The key to remember though is that RESP’s are not a trust at law.
But what happens to the funds on the death of the subscriber? It depends on the terms of the contractual agreement and on the terms of the subscriber’s Will.
Unlike an RRSP or a TFSA, the proceeds of an RESP do not flow outside of the subscriber’s estate into the hands of a designated beneficiary. The RESP is an asset of the subscriber, not the beneficiary.
So when talking to clients with RESP’s here are some things to consider:
Does the client want the RESP to continue after death? Does the client want the contributions to be returned to the estate and fall into the residue? Are the contributions to be withdrawn and distributed to the intended beneficiaries (or the right to withdraw transferred to named beneficiaries)? Are the contributions to be withdrawn and used to fund an education trust created for named beneficiaries?
If the client wants to continue the RESP for the benefit of the beneficiaries after death then consideration (in the Will) must be given to naming a successor subscriber; naming beneficiaries; how the funds should be invested and management of the plan and limits (if any on withdrawals of contributions by the subscriber) and how the RESP will be funded.
And remember, a subscriber can withdraw contributions from the RESP and receive accumulated income payments, which can be rolled over into their own RESP.
Lesson Learned: RESP’s are important assets held by clients but this does not mean that most understand how they work on death: warts and all.

Until next time,