Kevin Greenard: Don’t overlook RESP assets in your estate plan

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A registered education savings plan is a popular investment vehicle to help save for a child or grandchild’s post-secondary education.

A Registered Education Savings Plan (RESP) is a popular investment vehicle to help save for a child or grandchild’s post-secondary education. They are popular because they offer a few key benefits such as:

1) Income tax deferral: Income earned within the plan is “protected” and is not subject to annual tax. Instead, the income is included in the beneficiary’s taxable income when the money is ultimately withdrawn to fund the beneficiary’s post-secondary education. With tuition tax credits available and generally lower taxable income, this often translates to little or no tax payable (which is perfect for income splitting).

2) Income splitting opportunities: When withdrawals are made, the income inside the RESP is taxed in the hands of the beneficiary (the student), who is generally in a lower tax bracket, as opposed to the subscriber, who is generally in a lower tax bracket. higher tax bracket.

3) Government grants: Under the Canada Education Savings Grant (CESG) program, the federal government will provide up to $500 each year contributions are made for an eligible child, up to a maximum of $7,200 per child . There are also provincial grants that an eligible child can receive. If there is unused grant room from a previous year, the maximum annual CESG can be up to $1,000.

When it comes to estate planning, RESP assets are often overlooked. Many parents and grandparents (the subscriber) do not think about what will happen to the plan if they die before the plan assets have been fully withdrawn in the form of Educational Assistance Payments (EAPs) . RESPs have a life of 35 years and contributions can be made for 31 years from the time the account is opened. Because RESPs can stay open for so many years, it’s important for the subscriber to factor this into their estate plan.

Unlike other registered accounts such as a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), or Tax-Free Savings Account (TFSA), assets in an RESP are considered part of the estate of the deceased, even if a beneficiary has been named. If there is no surviving joint subscriber or successor subscriber named in the will, the value of the RESP becomes part of the estate. This means probate fees are payable (approximately 1.4%) and the beneficiary will have to wait until probate has been granted. In addition, any government grants may need to be repaid from the RESP and the assets may be exposed to estate creditors.

Another factor to consider is that RESP funds may not be distributed according to your intentions. For example, if a person’s estate were bequeathed equally to two children, the RESP would be divided 50-50 by will. However, if one child had already attended post-secondary school and used their share of the RESP, the other child would not receive their full share.

A few steps can be taken to ensure that the RESP is easily accessible, is not subject to probate or grant repayment, and can be distributed according to your wishes. Here is an overview of important estate planning considerations for your RESP.

Appoint a successor subscriber

If the subscriber’s will contains no instructions regarding the RESP, the assets will form part of the remainder of the estate and will be treated according to the terms of the will. In most cases, the only option may be to terminate the plan, which results in the refund of all contributions to the subscriber’s estate. All CESGs (but not income earned on CESGs) that were not paid out as EAPs must be repaid to the government. The subscriber’s estate may also be subject to tax on accrued income (but not on initial contributions).

This result (plan collapse) is not what most subscribers wanted or wanted. Therefore, the best option is for the subscriber to specifically address the RESP in their will by naming a successor subscriber. If the subscriber dies, the named successor subscriber will have the power to preserve and continue the plan on behalf of the beneficiary.

The grandparents of the sole (or last) subscriber may consider naming the beneficiary’s parent as successor subscriber. It may also be possible to establish a testamentary trust — with enough assets to continue making contributions — as a successor subscriber to the plan.

Open the package with co-subscribers

When we first meet parents or grandparents who want to set up an RESP, one of the first things we discuss is how RESPs can be opened in single name (single subscriber) or joint name ( co-subscriber).

If there are two parents or two grandparents, we almost always recommend opening the RESP with joint subscribers, unless there are blended family considerations. With joint subscribers, upon the death of a joint subscriber, the RESP becomes the property of the surviving joint subscriber. On the death of the last surviving joint subscriber, the RESP becomes part of that person’s estate and must be distributed according to the terms of his or her will.

For this reason, we also generally recommend including a clause in a couple’s mirror wills that specifies what to do with the RESP upon final death (such as naming a successor subscriber).

Different RESP subscriber and contributor

In some cases, grandparents want to open an RESP for their grandchildren, but may find that their health is deteriorating or they are getting older. If it makes sense, we suggest that the parents be the subscriber/co-subscriber and the grandparents fund the RESP contributions.

This helps achieve the goal of grandparents funding their grandchildren’s future post-secondary education, while reducing estate risk as the subscriber is younger. When this approach is used, the parents are the subscribers, not the grandparents. This means parents ultimately control the account and have the ability to withdraw money from the account at any time and control future withdrawals.

Proxy

When you update your will to include RESP assets, we also recommend that you update your power of attorney document to include details on how to administer any RESP you open. This way, if you become disabled, your power of attorney will still have the authority to make RESP contributions to the plan and to make withdrawals when the time comes for the beneficiary to pursue post-secondary education.

Keep your portfolio manager informed

As you can see, it’s important to have an estate plan in place for any RESP you subscribe to. Another important thing is to make sure your portfolio manager is kept up to date on any changes to your will and power of attorney documents. This is information we obtain for all of our customers for a number of reasons.

First, if a client dies, we know who their executor is and what their RESP wishes were. Second, if a client becomes disabled, we know their RESP wishes and who their proxy is. Upon receipt of the power of attorney document and doctor’s note, we can administer the RESP as directed by the power of attorney. Finally, we want to ensure that at every stage, investment objectives, risk tolerance and time horizon align.

Kevin Greenard CPA CA FMA CFP CIM is Senior Wealth Advisor and Portfolio Manager, Wealth Management at The Greenard Group at Scotia Wealth Management in Victoria. His column appears weekly on timescolonist.com. Call 250-389-2138. greenardgroup.com

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