RESPs AND YOUR ESTATE: PLAN AHEAD


Written on March 12, 2013 – 7:00 am | by Steven Frye

A Registered Education Savings Plan, or RESP, is an investment vehicle used by parents, grandparents or care givers to create a post secondary education fund for children under their care. The principal advantages of RESPs are the access to the Canada Education Savings Grant (CESG) and a source of tax- deferred income. These plans have become a very popular form of forced savings for our children’s education needs.

Therefore, it would not be unusual these days to encounter such plans in the administration of estates. If the subscriber of the RESP (being the person who created the RESP and not the beneficiary of the RESP) is deceased, then the RESP must be dealt with according with the terms of the RESP contract and the law in general that governs RESPs and other estate assets. This includes the Income Tax Act which determines when and how a successor subscriber can take over the RESP to continue and preserve it. However, the Income Tax Act does not prescribe or determine who has the legal right to become a successor subscriber.

The simplest way to establish a successor subscriber is for the will or estate plan of the deceased subscriber to contain a specific direction to transfer the rights as subscriber to a specific person. Unfortunately most people who create RESPs do not think to appoint a specific successor in the will or estate plan.

In absence of a specific appointment, the preservation and continuance of the RESP becomes a major difficulty. The RESP becomes part of the estate and does not belong to the RESP beneficiary. The estate cannot designate anyone to preserve the RESP. As a result, the estate (and not the beneficiary) benefits from the RESP. The only legal option is to terminate the RESP. All contributions made to the RESP will be returned to the estate. All the CESG payments made and in the RESP at the time of death will be refunded to the government. And under certain conditions, all the earnings from the RESP will paid out to the estate and subject to income tax and possibly a 20% penalty. However if the conditions are not met, the earnings can be forfeited.

So for those who have not done so, please designate a specific successor subscriber to the RESP in your will or estate plan.

There may be some options if no successor subscriber is appointed. More on this in my next blog.

Thanks for reading

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