A Registered Education Savings Plan (RESP) is a very popular and an effective way for you to save for your child's post-secondary education. These plans offer significant benefits; however, they are frequently overlooked in proper estate planning. To ensure your educational savings are protected and used as intended, we will explore the importance of why our law firm takes the required time to competenly incorporate your RESPs into your estate plan.
RESP Meaning – Understanding the Basics of a RESP:
A Registered Education Savings Plan (RESP) is a government-registered, tax-advantaged savings instrument designed to facilitate the accumulation of funds for the purpose of financing post-secondary education of your beneficiary to the RESP plan. The RESP contribution funds held within a RESP may be utilized for qualified educational expenses incurred at recognized institutions, including, but not limited to, trade schools, CEGEPs, colleges, universities, and apprenticeship programs. Furthermore, in anticipation of your own future post-secondary educational costs, you may establish and contribute to an RESP for your own educational benefit.
Key features of a RESP contribution include:
There is no annual RESP contribution limit, but there is a RESP lifetime contribution limit of FIFTY THOUSAND CANADIAN DOLLARS ($50,000.00 CAD), per beneficiary.
The funds within an RESP grow tax-free.
RESP withdrawal rules are that when funds are withdrawn as educational assistance payments (EAPs), they are taxed in the hands of the RESP beneficiary, who will more than likely be in a lower tax bracket.
The Canada Education Savings Grant (CESG) (also known as the RESP government match) can provide an RESP grant limit match of FIVE HUNDRED CANADIAN DOLLARS ($500.00 CAD), per year for each eligible child, with a RESP max contribution of SEVEN THOUSAND TWO HUNDRED CANADIAN DOLLARS ($7,200.00 CAD), and there may be additional provincial grants.
Registered Education Savings Plans (RESPs) may remain active for an extended period, with contributions allowed for up to 31 years following the initial account opening. Additionally, funds within the RESP may be accessed and utilized until the end of the 35th year.
Why RESPs are Vital in Estate Planning:
It is extremely important to note that, unlike Registered Retirement Savings Plans (RRSPs) or Tax-Free Savings Accounts (TFSAs), the assets held within your Registered Education Savings Plan (RESP) do not pass directly to your designated beneficiary upon your death. Instead, such assets form part of your estate and shall be distributed in accordance with the provisions of your Will or, in the absence of a Will, pursuant to applicable laws of intestacy.
This may lead to several potential issues, such as:
Probate Fees: Probate fees will be payable on the RESP assets.
Exposure to Creditors: In accordance to estate administration legislation, the assets may be exposed to the creditors of the estate.
Repayment of Government Grants: Any government RESP grant that has not been paid out as EAPs may have to be repaid.
Risk of Unintended Distribution: In accordance with the RESP contribution rules, the RESP may collapse with the contributions refunded to the estate and potentially taxed at the estate level. This outcome is often not the subscriber's intention.
As well, in the event your Last Will and Testament does not contain specific provisions regarding a RESP account, the assets held within the RESP investment shall be treated as part of the residue of your estate and distributed in accordance with the terms set forth in the Will. In such instances, the RESP benefits may be liquidated, and any contributions made to the plan will be refunded to your estate. Any CESGs that have not been disbursed as EAPs must be remitted to the Government of Canada. In accordance with the RESP rules, although no tax will be imposed on the original contributions to the plan, your estate may be liable for taxation on any income and/or capital gains accumulated within the RESP.
Strategies for Preserving Your Intentions for a RESP:
To ensure that proper intentions for your RESP are upheld, our wills and estate lawyer advises that you consider implementing the following strategies:
Naming a RESP Successor Subscriber: In accordance with Ontario estate law, where there is a RESP death of subscriber, appointing a RESP successor subscriber within your Will allows the RESP to be maintained and continued on behalf of your beneficiary.
For joint RESP subscribers: Include provisions within your Will that specifically address the disposition and management of the RESP upon the death of the surviving RESP subscriber, ensuring clear directives on how the RESP is to be administered.
Appointing a Testamentary Trust: Establish a trust within your Will to serve as a RESP successor subscriber. The trustee you appoint under the terms of the RESP trust shall be legally bound to administer the RESP in accordance with the provisions set forth in the trust, for the benefit of your designated beneficiary.
Using Co-Subscribers: Establishing a RESP with co-subscribers ensures that, upon the death of one co-subscriber, the RESP will transfer to the surviving co-subscriber. However, the caveat to this is that upon the death of the last surviving co-subscriber, the RESP will become part of the estate of the deceased subscriber. It is further recommended that co-subscribers incorporate a provision in their respective mirror Wills, expressly delineating the manner in which the RESP is to be administered and distributed following the death of the last surviving co-subscriber.
Additional Factors to Consider:
Power of Attorney: It is essential to ensure that your Power of Attorney document includes explicit provisions regarding the administration of any RESP you establish. In the event of your incapacity, your designated attorney will have the authority to make contributions to, and initiate withdrawals from, the RESP in accordance with the terms outlined in the Power of Attorney.
Review Your Contract: Before making estate planning decisions regarding your RESP, review the terms of your specific contract. By reviewing the initial RESP contract, you can ensure that you understand the key provisions that will impact your decisions and help you align your estate plan with your overall financial and family goals. Should you have any inquiries, feel free to correspond with our office at a time most convenient for you for guidance specific to your situation.
Keep Your Portfolio Manager Informed: Keep your Portfolio Manager updated on any changes to your Will and Power of Attorney documents.
By incorporating your RESP into your estate plan, you can ensure that the funds are used as intended to support the education of your beneficiaries. Failing to plan properly may lead to unintended consequences, including the potential loss of government grants, tax implications, and the collapse of the plan.
Important Key Takeaways:
RESPs are a popular investment vehicle for post-secondary education but are often overlooked in estate planning.
Unlike RRSPs and TFSAs, RESPs do not automatically pass to the beneficiary upon your death, becoming part of your estate instead.
Failing to include a RESP account in an estate plan can lead to probate fees, exposure to creditors, and repayment of government grants.
Naming a successor subscriber, establishing a testamentary trust, or using co-subscribers are strategies to preserve intentions for an RESP.
It is important to review the RESP contract, update Power of Attorney documents, and keep your Portfolio Manager informed.
Proper planning ensures that funds are used as intended and can prevent unintended consequences.
Red Booth Law
Estate Litigation | Probate | Wills & Trusts
Toronto | Bowmanville | 416 953 0040 | info@redboothlaw.com
NOTE: It's important to know that laws and regulations are subject to change, and the information provided in the article may not reflect the most up-to-date legal requirements. Before making any decisions or taking any action, it's essential to consult with a legal professional to ensure that you have the most current and accurate information.
The content provided on this website is for informational purposes only and should not be considered as professional legal advice. If you have specific questions or concerns about your situation, it's always best to consult with our estate lawyer who can provide personalized guidance.