RESPs continue to be a popular way to save for a child’s or grandchild’s education. But what happens when the RESP subscriber—the person who creates and contributes to an RESP—dies before the RESP is fully paid out?
Let’s look at some planning options.
An RESP is not a trust. It is a contractual arrangement between a subscriber and a promoter (usually a financial institution). If there is no surviving joint subscriber, an RESP contract becomes part of the estate of a deceased subscriber and, if proper planning is not in place, the contract’s value belongs to the residuary beneficiaries of the estate (for more on this, see “Quebec laws are different,” below).
Residuary estate beneficiaries usually want their inheritance maximized. So, after the RESP subscriber dies, the executor will likely collapse the RESP and distribute RESP contributions to those beneficiaries. If the conditions for an Accumulated Income Payment (AIP) are met, beneficiaries can also get the after-tax investment growth from the contributions and from Canada Education Savings Grants (CESGs).
This result will likely be contrary to the wishes of the subscriber, who likely established the RESP to give financial assistance to a child or grandchild pursuing a post-secondary education.
To avoid that situation, the RESP subscriber can appoint a successor subscriber by will (for additional notes, see “Be careful,” below). The simplest method is to appoint a trusted person as successor subscriber. A more complex method is to appoint a testamentary trust as successor subscriber.
If the successor subscriber is a person, the original subscriber is essentially giving that person the RESP contributions and, if the conditions for an AIP are met, the after-tax investment growth realized from those contributions and from the CESGs. (The CESGs are owned by, and have to be returned to, the government.) But the original subscriber cannot compel the successor subscriber to preserve the RESP for the benefit of its beneficiaries.
The person appointed as successor subscriber may collapse the RESP. If that occurs, there would no longer be any RESP assets available to assist an RESP beneficiary who’s pursuing post-secondary education.
The original subscriber can minimize (and likely eliminate) that possibility by appointing a testamentary trust as the successor subscriber. The trust holds the RESP and the trustee must follow the directions established by the trust terms.
The trustee of the testamentary trust could be the person the original subscriber would have appointed as successor subscriber. In many situations, the trustee would also be the person the original subscriber appoints as executor of the will in which the trust is created.
If the original subscriber wishes, the will can direct the executor to use general estate funds to contribute to the RESP before it is transferred into the testamentary trust in order to reach the $50,000 contribution limit. The executor would not (personally) become the successor subscriber, because the contribution comes from estate funds, not from the executor’s personal funds.
The testamentary trust holding the RESP would, subject to any contrary provisions in the RESP contract, likely include trustee directions such as:
- to administer the RESP and invest its assets for the benefit of the beneficiary(ies) until the beneficiary(ies) are eligible for Educational Assistance Payments (EAPs);
- to add or change a beneficiary as the trustee considers appropriate and if allowed by law;
- to direct EAPs and to use refunds of contributions to assist financially with the post-secondary education of an eligible RESP beneficiary, at the times, in the amounts, and in the manner that the trustee considers appropriate;
- to maximize use of CESGs when making EAPs;
- to wind up the trust when all RESP assets are depleted or, if there are remaining assets, to only wind up the trust when:
- the post-secondary education of the RESP beneficiary(ies) is complete;
- the maximum life of the plan, as specified by law, has been reached; or
- all the RESP beneficiaries have died;
- if an RESP beneficiary is the beneficiary (or can qualify as a beneficiary) of a Registered Disability Savings Plan (RDSP), if the conditions for a rollover of RESP investment growth are met, and if the conditions for an AIP are met, to transfer, on a tax-deferred rollover basis, as much of the investment growth realized from the RESP contributions and CESGs as the trustee considers appropriate to a RDSP for that beneficiary;
- to distribute all unused RESP contributions and, if the conditions for an AIP are met, the after-tax investment growth realized from those contributions and from the CESGs (to the extent that no rollover to a RDSP is made), to specified individuals (which may include an RESP beneficiary) or charities.
Appointing a successor subscriber in the will of the original subscriber will likely ensure that the goal of the original subscriber when the RESP was established will be realized, even after the death of the original subscriber. If such an appointment is not made, it is likely that the personal representative of the original subscriber will, after the death of the original subscriber, have to terminate the RESP in order to obtain the portion of the RESP assets that belong to the estate of the original subscriber, and the goal of the original subscriber will be frustrated.
Quebec laws are different
Quebec law does not recognize the concept of a right of survivorship, so the interest of a deceased RESP joint subscriber who lives in Quebec will be treated as a tenancy-in-common, and will form part of the estate of that subscriber. So, the value of that interest will likely belong to the residuary beneficiaries of the estate unless the joint subscriber appoints a successor subscriber by will.
If that happens, the RESP would have two co-subscribers, the surviving subscriber and the successor subscriber (each having a one-half interest as tenants-in-common.) The exception would be where the deceased joint subscriber has appointed the surviving joint subscriber by will as successor subscriber.
The existence of two co-subscribers is likely acceptable to CRA. However, to avoid the potential decision deadlock that may occur if an RESP has two co-subscribers, perhaps joint subscribership should be avoided by Quebec residents unless each appoints the other as successor subscriber by will.
Quebec subscribers with notarial wills will not require probate, even though the RESP is an estate asset. However, probate will usually be required in other provinces.
Before making planning decisions regarding the potential death of a subscriber, check the terms of the RESP contract. The terms of the contract may allow the subscriber to designate a successor subscriber by form, or may provide that the personal representative of a deceased subscriber automatically becomes the successor subscriber. Such contractual terms are rare and, even if they exist, it may be best to plan around them, if possible, and appoint a successor subscriber by will.
If an RESP has joint subscribers, each needs to appoint a successor subscriber (and, preferably, the same one) because both may die at the same time.
Floyd Gradley is AVP, Mackenzie Investments Tax and Estate Planning Team, and an estate and trust lawyer.