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Grandparents, relatives and even family friends can open an RESP account. What should they consider from an estate planning perspective?
I’m the grandfather to two young boys. They are eight and six years old. I opened a joint RESP for both of them after the youngest was born. I will turn 75 years young this year and am in good health. However, I have recognized that one’s health is a fickle thing. The question that I’m debating is whether to transfer the account over to my son sooner rather than later.
—Bill
A registered education savings plan (RESP) is a terrific way to save for post-secondary education. Parents can open these accounts for their children, and grandparents can also open them for their grandchildren. In fact, anyone can open an RESP for a child, including other relatives or even family friends.
RESP contributions grow tax-deferred and are eligible for government grants and bonds. Withdrawals are partially taxable and partially tax-free. The taxable portion can be taxed to the post-secondary student, who may pay little to no tax on the income.
Some grandparents choose to contribute by giving money to their children for their grandchildren’s RESP. This can be preferable—for example, if the grandparent wishes to benefit their grandchildren without being responsible for managing the account. This approach can also help families avoid the risk of overcontributing to the account (there is a $50,000 lifetime limit per beneficiary) or making contributions that do not qualify for government grants (typically $2,500 in contributions for the current year, and up to $2,500 for a previously missed year, are eligible).
In your case, Bill, there can be complexities if the RESP makes up part of your estate. Your grandchildren could still be attending post-secondary school in 15 years, and you would be in your 90s. Hopefully, you will be there to see them graduate. But as you allude to, you never know.
You mention that you have a joint RESP. I think what you mean is that you have a family RESP that is for both grandchildren. I like this approach as it allows for more flexibility for siblings. The account can be used for either child in different increments. One may have more expensive schooling than the other, or one may not pursue post-secondary education at all.
Some providers allow you to open a joint RESP account, meaning one that has two subscribers. (A subscriber is someone who opens an RESP on behalf of a beneficiary.) This can be convenient for administrative purposes, but also from an estate planning perspective. Typically, only spouses or common-law spouses—including former spouses—can be joint subscribers, though.
Depending on the financial institution, you may be able to name a successor subscriber for an RESP account. This person takes over the account if the original subscriber passes away. You should check, Bill, to see if you can name a successor subscriber for your grandchildren’s RESP account. This option is not available to Quebec residents.
If not, the RESP account could become part of your estate, and you may have to pay probate fees as well as income tax on the growth of the contributions. You may also have to repay the government grants and bonds.
Even if you cannot name a successor subscriber at the financial institution where the RESP is held, you may be able to do so in your will. The account could then be transferred by your estate to your child, who would continue to manage the account for your grandchildren.
An RESP account can be transferred during your life without tax implications. The condition is that a beneficiary of the transferring RESP is the same as the receiving RESP account.
As a result, Bill, you could consider proactive estate planning by transferring ownership of the account during your life to your child for your grandchildren.
In summary, you have options, Bill. You can transfer the RESP now to your child for your grandkids, or deal with the account upon your death. If you cannot name a successor subscriber where the RESP is located, you should consider doing so in your will.
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I am a financial advisor. I have a situation whereby the grandmother contributed all the funds into her grandchildrens’ RESP. There were 2 beneficiaries – 2 grandchildren. One beneficiary has already received her share of the RESP for education. The rest of the funds in the RESP were for the other beneficiary. The grandmother passed away and her son, the father of the children, became the subscriber of the RESP. The grandson, aged 22, has not used the funds yet and is still deciding what he would like to do. In the meantime, the father called my office and left a message stating that the son won’t be needing the money and he would like to cash it in. I do believe the father needs money and I am wondering if this should be a legal matter to protect the grandson’s inheritance (RESP). I am not sure in this case if the father is allowed to withdraw all the funds considering he did not contribute any of it.
Would appreciate your thoughts.
Elizabeth
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists.