Understanding RESPs in Estate Planning: Educational Legacy Options

Registered Education Savings Plans (RESPs) are a powerful tool for Canadians to invest in their children’s or grandchildren’s future education. While RESPs are commonly used during your lifetime, integrating them into your estate plan can ensure their benefits extend even after you’re gone.

This guide explores how RESPs work, their role in estate planning, and strategies for maximizing their value as an educational legacy.

What Is an RESP?

An RESP is a government-registered savings account designed to help families save for post-secondary education. Key features include:

• Tax-Advantaged Growth: Investment earnings grow tax-free within the account.
• Government Grants: The Canada Education Savings Grant (CESG) matches contributions up to $7,200 per beneficiary.
• Flexibility: Funds can be used for tuition, books, housing, and other educational expenses.

RESPs are established by a subscriber (usually a parent or grandparent) for a beneficiary (the student).

Why Include RESPs in Your Estate Plan?

RESPs can form a meaningful part of your legacy by ensuring funds are available for the educational needs of future generations. Integrating RESPs into your estate plan provides several benefits:

1. Preserving Educational Goals: Ensures the funds are used for their intended purpose.
2. Minimizing Taxes: Provides opportunities for tax-efficient wealth transfer.
3. Avoiding Disputes: Clarifies ownership and beneficiary arrangements, reducing potential conflicts among heirs.
4. Continuing Your Legacy: Supports the long-term educational aspirations of your family.

Key Considerations for RESPs in Estate Planning

1. Understanding Ownership and Contributions

RESPs are owned by the subscriber. Contributions to the RESP are not tax-deductible, but the earnings and grants within the account grow tax-free. Upon withdrawal:

• Educational Assistance Payments (EAPs): Include earnings and grants and are taxable in the hands of the student, typically at a low tax rate.
• Refund of Contributions: Paid tax-free to the subscriber or beneficiary.

Incorporating these features into your estate plan ensures the funds are distributed as intended.

2. Designating a Successor Subscriber

One of the most critical aspects of RESP estate planning is naming a successor subscriber. The successor takes over the account and ensures its continuation. Common choices include:

• A spouse or partner.
• A parent or grandparent of the beneficiary.
• Another trusted family member.

By naming a successor subscriber, you avoid having the RESP collapsed upon your death.

3. Handling Multiple Beneficiaries

For family RESPs, which allow multiple beneficiaries, ensure your estate plan specifies how contributions and grants are allocated among them. Consider:

• Equal distribution among beneficiaries.
• Adjustments for age or educational needs.

Clearly documenting your intentions helps avoid disputes.

4. Tax Implications

When an RESP is not properly planned for in an estate, the following may occur:

• Collapse of the Account: The grants are returned to the government, and earnings are taxed.
• Additional Taxes: Earnings withdrawn without a beneficiary enrolled in post-secondary education are subject to regular income tax plus a 20% penalty.

Work with a tax advisor to minimize these risks.

5. Contingency Planning

Address scenarios where:

• The beneficiary does not pursue post-secondary education.
• The successor subscriber cannot fulfill their role.
• Additional funds remain after educational needs are met.

Strategies such as transferring funds to a sibling’s RESP or rolling them into a Registered Retirement Savings Plan (RRSP) can help maintain tax efficiency.

Integrating RESPs into Your Estate Plan

Update Your Will

Include specific provisions in your will to address RESP ownership and management. Key details may include:

• Naming a successor subscriber.
• Outlining how the RESP aligns with broader estate goals.
• Specifying alternate arrangements if the original beneficiary does not use the funds.

Coordinate with Other Estate Documents

Ensure your RESP plan aligns with:

• Powers of Attorney: Designate someone to manage the RESP if you become incapacitated.
• Trust Agreements: Establish trusts for minors to manage RESP-related funds upon withdrawal.

Communicate Your Plan

Discuss your RESP intentions with family members and your chosen successor subscriber. Transparency reduces misunderstandings and ensures everyone understands your goals.

Case Study: RESP Estate Planning in Action

Scenario: Mark and Susan, grandparents in Ontario, set up a family RESP for their three grandchildren. The RESP includes $25,000 in contributions and $5,000 in CESG funds. They want to ensure the RESP continues supporting the grandchildren’s education if they pass away.

Steps Taken:

1. Naming a Successor Subscriber: Mark and Susan designate their daughter as the successor subscriber in their wills.
2. Allocating Contributions: They specify equal distribution among the grandchildren.
3. Contingency Planning: They outline steps for unused funds, including transferring them to a sibling’s RESP or rolling them into an RRSP.
4. Tax Optimization: Their financial advisor ensures the RESP aligns with their overall estate plan, minimizing tax liabilities.

Outcome: Mark and Susan’s RESP continues to benefit their grandchildren without disruption, honoring their educational legacy.

Common Mistakes to Avoid

1. Failing to Name a Successor Subscriber: Without a designated successor, the RESP may collapse, forfeiting grants and tax advantages.
2. Neglecting Tax Implications: Unplanned RESP withdrawals can result in penalties and unnecessary taxes.
3. Lack of Communication: Family disputes may arise if intentions are not clearly communicated.
4. Ignoring Contingencies: Failing to plan for unused funds or non-participation in post-secondary education.

RESPs for Grandparents

Grandparents often use RESPs to support their grandchildren’s education. Key tips for grandparents include:

• Coordinate with Parents: Ensure contributions do not exceed the $50,000 lifetime limit per beneficiary.
• Leverage Grants: Maximize CESG contributions by contributing at least $2,500 annually per beneficiary.
• Plan for Continuity: Name a successor subscriber to avoid account closure.

Advanced Strategies for RESP Estate Planning

Family RESP Pools

Family RESPs allow multiple beneficiaries within one account, providing flexibility. Estate planning considerations include:

• Ensuring equal access to funds.
• Planning for varying ages and educational timelines.

Intergenerational RESP Planning

RESPs can span decades, making them suitable for long-term educational legacies. Consider:

• Creating a trust to manage RESP-related funds.
• Using RESP funds to support future generations through carefully structured family agreements.

Philanthropic Use of RESP Funds

Unused RESP funds can be donated to educational charities or institutions. While this does not offer tax benefits directly from the RESP, it aligns with values of supporting education.

Resources for RESP Estate Planning

• Canada Revenue Agency (CRA): RESP tax rules and guidelines.
• Employment and Social Development Canada: Information on CESG and CLB programs.
• Financial Consumer Agency of Canada: RESP resources for families.

RESPs are more than just a savings account—they’re a vehicle for creating an enduring educational legacy. By integrating RESPs into your estate plan, naming a successor subscriber, and addressing potential contingencies, you can ensure your investment in education benefits future generations. Start planning today to maximize the impact of your RESP and secure your family’s educational future.