If you’re a parent or have young relatives, odds are you’ve heard about Registered Education Savings Plans (RESPs). But what is an RESP?
A Registered Education Savings Plan (RESP) is a tax-advantaged investment vehicle designed to help Canadians save for a child's post-secondary education. As a government-sponsored program, subscribers can start contributing to their child’s future early and make contributions that grow tax-free until those contributions are withdrawn from the account.
Plus, there’s the Canada Education Savings Grant (CESG), which provides additional government funds to Registered Education Savings Plans (RESPs). CESG provides 20% on the first $2,500 of annual RESP contributions per child, up to a maximum of $500 per year. The lifetime maximum CESG is $7,200 per child.
RESPs and CESG funding are powerful financial tools for parents, guardians, and extended family members to invest in a child's future. As such, they should also be accounted for in your estate plan, which is a set of legal documents that protects your estate, assets, and loved ones in emergencies and after you pass away.
In this article, we’ll dig deeper into what happens to an RESP if the beneficiary or subscriber dies, how to account for RESPs in your will, and more.
The importance of including an RESP in estate planning
It can be hard to plan for the future when life is so unpredictable. But tools like RESPs and estate plans make it possible to secure a better tomorrow for yourself and your loved ones.
What happens if your estate plan doesn’t cover your RESP?
If you don't have an RESP clause in your estate plan, several issues could occur if you become incapacitated or pass away.
What happens to your RESP if you as the subscriber pass away?
If you are the sole subscriber of an RESP and pass away without addressing your RESP in your estate plan:
- Your RESP may collapse (close) and become part of your residual estate
- Any matched government funds would need to be repaid
- The beneficiaries of your estate residue would receive any remaining assets, and these beneficiaries may not be the same beneficiaries of your RESP
- If you didn’t appoint any beneficiaries for the residue of your estate in your will, the residue would be distributed according to your province’s intestate laws
- Another relative could set up a new RESP for the original beneficiary, though they’d have to be mindful of the existing lifetime contribution room of the beneficiary (max $50,000) and how much CESG they are eligible for (max $7,200)
What happens to your RESP if you as the subscriber lose capacity?
Incapacity can be temporary or permanent and can be any physical or mental impairment that results in your lack of sufficient understanding to make rational and responsible decisions related to your healthcare or personal assets.
If you lose capacity and your powers of attorney don’t specify how RESPs should be handled:
- No one (except a co-subscriber) may have the legal authority to make RESP contributions on your behalf
- If you’ve set up automatic contributions to your RESP, no one except an appointed attorney for property can pause or change your investment strategy
Is your RESP subject to probate?
Yes, if you're the sole owner of an RESP passes away and your RESP closes, the funds will be deposited into the deceased’s residual estate and will be subject to probate if necessary.
Probate isn’t always necessary, especially for small, simple estates. However, it can be more common for estates that have solely owned real estate, as they are considered significant, highly valued assets.
Options for RESPs in estate planning
Your estate plan can include a will, power of attorney documents, personal directives, asset lists, trusts, business succession plans and more. Among these documents, there are a few that you can use to protect your RESPs and their beneficiaries.
Protect your beneficiaries and RESP in your will
There are multiple ways you can protect your existing RESPs and their beneficiaries in your will:
- Have a clause in your will to keep any RESPs open: Willful’s will automatically includes a dedicated RESP clause that ensures the account stays open if you, as the subscriber, pass away. This ensures that your RESP beneficiary can still access those funds in the future and protects any government-matching funds from having to be repaid.
- Name a successor subscriber: RESP succession planning may be easier than you think. By appointing an RESP successor subscriber in your will, you make sure that when you pass away, the appointed successor subscriber has the authority to preserve and continue the plan on your behalf.
- Create a testamentary trust: A testamentary trust specifies when and under which conditions the beneficiary may inherit your asset(s) after you pass away. It’s often used to hold inheritances for minor children until they reach the age of majority and can be an excellent way to protect a loved one’s inheritance regardless of what happens with their RESP.
- Appoint an executor who may choose a successor subscriber for you: Appointing an executor to manage and distribute your estate is one of the most important parts of writing a will. Your executor can also designate someone as a replacement subscriber on your behalf.
Protect yourself and your beneficiaries with powers of attorney
When you appoint an attorney for your personal care and property, you protect not only your health but also your assets.
In the event of incapacity, an attorney for personal care would follow the wishes you’ve documented in your personal directive and make medical and health decisions for you if you cannot.
An attorney for property would be able to act on your behalf regarding any of your assets, including contributing to or managing an RESP.
Learn more about powers of attorney →
Do beneficiaries pay tax on RESPs?
Beneficiaries of your RESP pay tax on the Education Assistance Payments (EAPs) they receive, which include government grants and investment earnings from the RESP. These EAP withdrawals are reported as taxable income on the beneficiary's tax return. However, since most students have little or no other income, the taxes on EAPs are typically minimal or zero.
On the other hand, the original contributions made by you as the subscriber to your RESP are not taxable when withdrawn by the beneficiary.
Learn more about how taxes work with your estate plan →
What happens if the RESP beneficiary dies?
If the beneficiary of your RESP passes away before using all their funds, you can name an eligible replacement beneficiary or choose to close the plan after the RESP beneficiary’s death.
Naming a replacement beneficiary
Anyone can be the beneficiary of an RESP as long as both of the following conditions are met:
- You have their social insurance number (SIN) before the designation is made
- They are a resident of Canada when the designation is made
If you add them to a family plan established after 1998, each beneficiary must be less than 21 years of age when named as a beneficiary.
However, if the replacement beneficiary already has an RESP, you must be careful to avoid over-contributing.
For family plans with multiple beneficiaries, the funds—including any CESG—can be shared among them. If one beneficiary passes away, RESP funds can roll over to siblings or the other beneficiaries in the plan so they can still use their portion.
However, each beneficiary can only receive a lifetime maximum of $7,200 in CESG. Any remaining CESG in your RESP after the plan is closed must be repaid to the government.
Need more finance tips for families? Read this guide →
Closing an RESP
If the original beneficiary has passed away, you can also close your RESP instead of naming a replacement beneficiary.
When you close an RESP, any remaining savings will be handled as follows:
- Grants and benefits received from the government must be returned
- Personal contributions will be returned, untaxed, you as the person who opened the RESP
As for your accumulated interest earned on benefits and contributions, you can:
- Withdraw it as an Accumulated Income Payment (AIP), which will be taxed as an income
- Transfer it to another RESP of yours or an RESP of your spouse’s
- Transfer it to your child’s RESP
- Gift it to a designated educational institution
What happens to an RESP when the owner dies?
Here’s a visual guide for what can happen in the event of an RESP subscriber’s death based on RESP inheritance rules:
If a subscriber of a jointly owned RESP passes away, the RESP's responsibilities will remain with the surviving subscriber(s), and it will remain open.
If the sole subscriber of an RESP passes away and they have named a successor subscriber, the RESP remains open, and the successor subscriber can continue to contribute to and manage it.
If the sole subscriber of an RESP passes away and they have not named a successor subscriber, their executor may be able to appoint a replacement subscriber for them, who will keep the RESP open and continue managing it.
If the sole subscriber of an RESP passes away and they have no successor and no replacement subscriber, the RESP may close and become part of their residual estate. In this case, government grants would also need to be repaid from the estate.
How Willful can help with RESP estate planning
Easy, customizable, and much more affordable than a lawyer, Willful makes estate planning for RESPs and other assets easy for you and your loved ones. RESPs aren’t the only way to account for your kids in your will, but they’re one of the most important ones.
Do you have a Willful will?
All Willful wills downloaded after August 15, 2024 automatically include an RESP planning clause stating that any of your RESPs should remain open when you pass away, which ensures your RESP beneficiaries can still have those funds without paying tax or losing them to government repayments.
If you made your Willful will before August 15, 2024, you can download your will again for free and it will have the new RESP clause in it!
Life can be unpredictable, but that shouldn’t stop you from making plans. Take the time to document your wishes and protect your loved ones today.
