With the bell having tolled on the beginning of another schoolyear, there is perhaps no more fitting time to offer a refresher on the details, advantages, and complexities of registered education savings plans (RESPs), while also exploring some of the nuances in relation to their impact on estate planning.
Overview and Advantages
In general terms, an RESP is a contractual arrangement between a subscriber and an approved third-party entity, generally a financial institution or a trust company, to offer tax-advantaged education savings for the benefit of one or more beneficiaries. The subscriber contributes to the RESP and, upon attaining eligibility, the beneficiaries become entitled to receive distributions of capital and income directly from the third-party entity.
In addition to offering tax advantages, an RESP also offers access to government contributions in the form of Canada Education Savings Grants (CESGs), equal to 20% of the value of the annual contributions made by the subscriber, to an annual maximum of $500 and a lifetime maximum of $7,200 per beneficiary. While RESPs have a lifetime subscriber contribution limit of $50,000, CESGs are treated independently and do not contribute to that lifetime cap.
Eligibility
In order to be eligible to receive distributions out of an RESP, beneficiaries must generally be enrolled in a program of post-secondary education at an eligible institution. However, if the named beneficiaries do not pursue post-secondary education, or if the subscriber dies before the RESP has been fully distributed, then questions may arise as to the entitlement to the balance of the funds.
Estate Planning Considerations
In certain cases, the language of the agreement between the subscriber and the institution may be informative as to the treatment of the proceeds. In many cases, the agreement may allow the appointment of a succeeding subscriber who can continue making contributions to the RESP. For these reasons, it is common for one to identify a succeeding subscriber in such situations in one's testamentary instruments.
In addition to the foregoing, an RESP differs from other registered assets as it pertains to the beneficial entitlements of the beneficiaries to an interest in the assets in question. In the case of other registered assets, such as RRIFs and RRSPs, a designated beneficiary has a presumptive entitlement to the proceeds of the assets in question, and those assets do not form part of the testator's estate.
In the case of an RESP, however, the beneficiary has no definitive beneficial interest in the asset. Its very nature consists of an agreement between the subscriber and the approved entity to make distributions for the benefit of the beneficiaries provided they satisfy the eligibility criteria. On the death of the subscriber, the RESP, excluding the value of any CESGs received, presumptively forms part of the subscriber's estate absent alternative evidence as to how it should be administered including, as previously mentioned, by way of the appointment of a succeeding subscriber.
In the absence of such estate planning steps, it may fall to the beneficiaries on the death of the subscriber to litigate the question of whether the RESP was, in fact, held in trust by the subscriber or their estate for the benefit of the named beneficiaries – an expensive and time-consuming ordeal that might have been avoided with prudent and thoughtful estate planning.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.