RESPs and estate implications

Registered education savings plans have become the cornerstone for saving for a child’s or grandchild’s post-secondary education.

With this increased popularity, you can expect that your clients will more often encounter RESPs during their administration of estates. And because of the larger RESP values, it is more likely that disagreements will arise respecting the administration of an RESP if the deceased sole subscriber did not appoint a successor subscriber to preserve and continue the plan for the benefit of the RESP beneficiary.

As part of a sole subscriber’s estate, an RESP must be administered according to the RESP contract and the law that governs RESPs and estate assets. That law includes the Income Tax Act, which establishes when and how a successor subscriber can act to preserve and continue an RESP. The Income Tax Act does not, however, determine who has the legal right to become the successor subscriber.

The simplest method of establishing who becomes the successor subscriber is for the will of the original subscriber to contain a direction to transfer his or her rights as subscriber to a specific person as successor subscriber. The appointed successor subscriber can then, upon the death of the original subscriber, preserve and continue the RESP pursuant to the Income Tax Act. Unfortunately, most RESP sole subscribers do not appoint a successor subscriber as part of their estate plan.

When no successor subscriber is appointed, it can be difficult to arrange for the preservation and continuance of the RESP. The plan becomes part of the subscriber’s estate and does not belong to the RESP beneficiary. Therefore, the executor of the will or the administrator of the estate of the deceased subscriber (the “personal representative”) cannot allow just anyone to become the successor subscriber, even if the intention is to preserve and continue the RESP to fund the education of the beneficiary. The estate, and not the RESP beneficiary, must benefit from the RESP.

When no successor subscriber is appointed, the personal representative’s only legal option may be to terminate the RESP. All contributions will be refunded to the estate of the subscriber, and all CESGs that have not been paid out as educational assistance payments (EAPs) will be refunded to the government.

In addition, if certain conditions are met (including the requirement that every RESP beneficiary is at least 21), the estate will receive an accumulated income payment (AIP). The AIP consists of all earnings from contributions and earnings from CESGs that have not been paid out as EAPs. The estate must pay income tax on the AIP and must also pay a 20% penalty tax. However, if upon termination of the RESP any one of the conditions necessary for the estate to receive the AIP is not satisfied, the AIP is forfeited to a designated educational institution.

Legal options when no successor has been appointed

Even if no successor subscriber is appointed by the deceased subscriber, it may still be legally possible to preserve an RESP to serve its intended purpose of funding the education of the RESP beneficiary. Let’s try to help a client, Linda, preserve two RESPs after the death of the sole subscriber, her mother Maggie.

Maggie is survived by her husband, Tom, and two children, Linda and Jack. Linda has a 16-year-old daughter, Laura, and Jack has a 20-year-old son, John.

Many years ago, Maggie started an RESP for Laura and a separate RESP for John. She did not appoint a successor subscriber for either RESP.

Linda would like to preserve and continue both RESPs to honour Maggie’s wish to help fund John’s and Laura’s education. Moreover, significant estate value will be lost if Linda has to terminate both RESPs. Neither RESP meets all of the conditions necessary for the estate to receive an AIP because neither beneficiary is at least 21, and so if the RESPs are terminated, the AIP from each plan will be forfeited. The estate will be entitled to keep only the RESP contributions.

Linda will incur personal liability to the estate if she simply allows someone to become the successor subscriber for each RESP. She will be giving value to the successor subscriber, without receiving equivalent value for the estate.

However, Maggie’s will, like most wills, gives the personal representative the power to transfer assets “in kind.” Therefore, if Tom is a beneficiary in Maggie’s will (and surviving spouses very often are beneficiaries of most, if not all, of the deceased spouse’s estate), Linda could allocate both RESPs to Tom as part of his share of the estate. With a contribution to each RESP, Tom would become the subscriber and could carry through with Maggie’s wishes.

Similarly, if Jack is a beneficiary in Maggie’s will (and children sometimes inherit a portion of their deceased parent’s estate), and if his estate share is larger than the value of “John’s” RESP, Linda could allocate “John’s” RESP to Jack as part of his share of the estate. The same opportunity exists for Linda, respecting “Laura’s” RESP. With a contribution to their respective child’s RESP, Jack and Linda would each become a subscriber and could carry out their mother’s wishes.

Linda may also have the option of allowing John to become the subscriber of the RESP for which he is the beneficiary. If John is a beneficiary in Maggie’s will, and if his estate share is larger than the value of “his” RESP, Linda could allocate the RESP to him as part of his estate share. With a contribution to the RESP, John would become the subscriber. However, this option has an inherent danger — John may decide not to pursue a post-secondary education and, when he turns 21, terminate the RESP so as to obtain the unused contributions and the after-tax value of the AIP.

The trust factor

In some situations, a testamentary trust can become the successor subscriber for an RESP. If Maggie’s will establishes a separate testamentary trust for each of Laura and John, each trust could become the successor subscriber for the respective trust beneficiary’s RESP by making a contribution to that RESP if:

• the estate benefit held in trust for the beneficiary is larger than the value of the RESP for which that person is the beneficiary;
• the trust terms are broad enough to allow the trust to act as a successor RESP subscriber; and
• the trust terms allow the trustee to use trust assets to contribute to an RESP.

Maggie’s will, like many wills, gives the personal representative a general power to transfer a minor’s estate benefit to a parent or guardian of the minor to hold in trust until the minor reaches the age of majority. Therefore, if Laura is a beneficiary in Maggie’s will but the will does not establish a testamentary trust to hold her estate share, Linda, as Laura’s parent, could hold “Laura’s” RESP in trust for Laura as long as Laura’s estate benefit exceeds the value of the RESP.

However, by using that general power, Linda would have no right to become subscriber of “Laura’s” RESP because the RESP contributions (and eventual AIP) would belong to Laura. Linda could do no more than hold the RESP in an informal trust and would be unable to exercise the powers of a subscriber.

Laura would have the right to have the informal trust terminated when she reaches the age of majority. With a contribution to the RESP at that time, Laura could become the subscriber. As discussed above for John, this option has an inherent danger — Laura may decide not to pursue a post-secondary education and, when she turns 21, terminate the RESP so as to obtain the unused contributions and the after-tax value of the AIP.

With each of these possible options, it will be difficult to determine the value of the estate’s interest in the RESP because the tax liability that may arise upon eventual termination of the RESP contract is unknown. If the successor subscriber eventually receives an AIP upon termination of the RESP contract, the AIP will be taxed based upon the successor subscriber’s marginal income tax rate at that time in the future.

Maggie’s failure to appoint a successor subscriber has created many significant issues for Linda to resolve. What could have been a simple transfer of each RESP to a successor subscriber has become a major estate administration problem, resulting in unnecessary expense and potential family discord. The issues would have been even greater if Maggie had subscribed to a family plan.

You can provide great value to your clients by ensuring that RESPs are dealt with as part of their estate plan. Note that, when appointing a successor subscriber, it is essential that the RESP contract be reviewed to determine the rights it gives and the obligations it creates. In most situations, it will also be essential to review and update your client’s existing will.

Floyd Gradley is AVP, Mackenzie Investments Tax and Estate Planning Team, and an estate and trust lawyer.