Monday, January 14, 2008

Estate Planning and Registered Education Savings Plans

A Registered Education Savings Plan (“RESP”) allows you to put funds away for your child, (or other young person such as your grandchild) for the child’s post secondary education. Taxes are deferred on income accumulating on the funds until the income is paid to the child for his or her education. The child then pays the tax on the income. The Canadian Government provides matching grants called Canada Education Savings Grants to RESPs. These grants equal 20% of contributions up to maximum contributions of $2500 annually per child. There are additional grants available to families with annual incomes of $74,357 or less.

Because RESPs allow tax deferral, income splitting, and attract government grants, they are a popular method for Canadians saving for a child’s education.

To set up an RESP, you enter into a contract with a promoter who is registered with Canada Revenue Agency. You then name a beneficiary. In the case of a family plan, you can name more than one beneficiary. You are called the “subscriber” of the plan.

For a more detailed discussion of how Registered Education Savings Plans work, see Canada Revenue Agency’s publication “Registered Education Savings Plans (RESPs) 2007.”

What happens if you die after you have set up the RESP?

One might think that on the death of the subscriber, the RESP funds would belong to the beneficiary of the plan. This would make a lot of sense, and probably correspond to what most people would intend to happen to the RESP on their death. But, it doesn’t work that way.

The beneficiary is only entitled to funds if and when the subscriber decides to. The subscriber can withdraw his or her contributions. The subscriber can also name other beneficiaries of the plan.

On the death of the subscriber, the RESP can be transferred to a successor subscriber. But who is a successor subscriber? Section 146.1 (1) (c) of the Income Tax Act, Canada, provides that the subscriber means “after the death of a subscriber under the plan, any other person (including the estate of the subscriber) who makes contributions into the plan in respect of a beneficiary….”

This section appears to mean that if you are the subscriber, on your death it will be necessary for someone to make a contribution to the plan to become a successor subscriber.

Do you have any say over who can be the successor subscriber? There appear to be four ways.

First, if you and your spouse (or common law partner) are joint subscribers, then your spouse (or common law partner) becomes the sole subscriber on your death.

Second, some plans may allow you to name a successor subscriber in the contract.

Third, if you do not have a joint subscriber, and you have not named a successor in the contract, then you can name a successor subscriber in your will.

Fourth, the executor of your will is entitled to administer the RESP if there is no joint subscriber, and you have not named a successor subscriber in the plan contract or in your will.

If the executor is entitled to administer the RESP, it might not be clear what his or her responsibilities are. May the executor use estate funds to contribute to the RESP for the benefit of the beneficiary of the RESP? Or must the executor withdraw the contributions for the beneficiaries of your estate in accordance with your will? This could create some significant problems if the beneficiaries of your will are not the same as the beneficiaries for your RESP.

For example, if you have named your children from you previous marriage as beneficiaries of the RESP, and your current spouse as the beneficiary of your will, your current spouse could demand that your contributions to the RESP be withdrawn for her benefit. The children will expect that the RESP will be used for their education. This conflict can be avoided if you spell out what is to happen to the RESP in your will.

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