The greatest gift you can give your child or grandchild is a promising future. Contributions to a Registered Education Savings Plan (RESP) will increase significantly as a child grows and will help offset the high costs of an education.
However, many Canadians have not considered what will happen to these savings after death. It’s important to deal with the RESP in your estate plan.
Before we discuss including an RESP in your estate plan, let’s talk about the benefits of an RESP.
What is an RESP?
An RESP allows you to support a child’s education through a tax-sheltered account. There is no maximum annual limit for contributions in an RESP, and the lifetime limit for a beneficiary is $50,000.
Through the Canada Education Savings Grant, the government matches contributions to a lifetime maximum of $7,200, which helps the account grow significantly.
Under the Canada Learning Bond (CLB), an additional incentive of $2,000 is also provided to help modest to low-income families save for a child’s post-secondary education. If the child does not attend school, the money is returned to the government.
What happens to an RESP when the subscriber dies?
Even after your death, contributions can be made to an RESP through a successor. If you’re a grandparent, you might name one of the parents as successor.
You also have the option of naming a testamentary trust as the successor. In this case, the RESP will be transferred to the testamentary trust for the beneficiary. You can properly fund that trust for continued RESP contributions after you die.
But before you name a successor, you must make sure you have an estate plan.
Why do you need to include the RESP in your estate?
An estate plan is a group of documents that describe your wishes after your death. This plan will determine how your property and savings are distributed and who will get how much of what. And if you want to make sure your dependants — school-aged children or grandchildren — have a funded education available, you must either name a successor who can continue contributions following your death or include the RESP in your will. You can then rest easy that the beneficiary of the RESP will receive Educational Assistance Payments (EAP) to help finance his or her post-secondary education.
What happens if the RESP is not in your estate plan or will?
If you die without including the RESP in your estate plan or will, savings in an RESP will not immediately go to the beneficiary. If you are the sole contributor or subscriber, you need to name an alternate who will have control over the savings plan when you die.
According to Estate Law Canada, “If the owner/director then passes away, the money still belongs to him or her and not to the named child. The RESP will then be an asset of the estate and will be divided according to the deceased person's Will, or if there is no Will, according to provincial intestacy laws.” Intestacy laws allow your province or territory to have control over any property or savings in your name. Most importantly, “If the RESP goes back into the estate, the portion of the money that is made up of government contributions over the years must be repaid to the government. The child won't get anything.”
If you’re looking to combat the many complications that might come from not including an RESP in your will, name an alternate or joint subscriber when you set up the RESP. This alternate director can take on the responsibilities of contributions into the RESP for the beneficiary’s post-secondary education even after your death.