RESPs and blended families

RESPs are an effective tool for assisting family members with education costs. However, opening an RESP is not akin to setting up a trust that will flow at death to the named beneficiaries — as do funds from an insurance policy, RRSP or RRIF. An RESP can run into complications in an estate planning context, particularly in blended families.

An RESP is a registered contract between the subscriber establishing the plan and the financial institution or organization. RESPs generally allow access to government savings programs, including the Canada Education Savings Grant (CESG). Subscriber contributions and government grants earn income inside the plan. Often, RESPs are set up with a single subscriber, such as a parent or grandparent, who allocates after-tax funds for the benefit of the beneficiary. The plan may also be set up by spouses and partners with “joint subscriber” status.

Once a beneficiary is eligible (generally, once enrolled in post-secondary education), the promoter (generally, a financial institution) pays contributions, as well as income and grants, known as education assistance payments, to the beneficiary. However, if a beneficiary does not become eligible, or the subscriber does not make payments to any eligible beneficiaries, the non-grant portions may revert to the subscriber.

If the subscriber dies without a named successor by will or other form of declaration¹ (depending on province), the RESP contract is generally terminated, and the accounts held within it fall into the deceased’s estate. In that case, the estate and its beneficiaries become entitled to the accounts.

As a result, the CESG portion as well as other government contributions that may be applicable (such as the Canada Learning Bond and various provincial benefit programs) are generally lost. Ultimately, the executor may be obligated to collapse the RESP (especially if those funds are needed to pay debts or taxes), and, unless the beneficiaries of the RESP and will are the same or there are explicit instructions in the will, the executor may be in a conflict if they don’t collapse it to pay debts or taxes.

Often in blended families, the beneficiaries of the RESP and will are not the same, leading to potential issues.

Consider the following example:

• Bayani is a successful businessman in his late 40s married to his second wife, Reyna. He has one independent son, Hari, age 19, from his prior marriage. They all reside in Alberta.
• Reyna is pregnant with their first child together.
• Bayani disappeared while on a business trip abroad and was declared deceased.
• As a sole subscriber, Bayani had opened an RESP for Hari’s benefit, now worth approximately $150,000, including CESGs. Bayani’s will does not name a successor subscriber for the RESP.
• Reyna was named as the executor and sole residual beneficiary of Bayani’s estate, with Hari named as the sole contingent beneficiary if Reyna predeceased Bayani, as Bayani had not yet amended his estate documents to reflect his future child with Reyna.
• Bayani assumed that Hari would receive the benefit of the RESP and therefore named Reyna as primary beneficiary of the remainder of his estate.
• Reyna and Hari have a good relationship at present, but Hari is about to attend university. While Hari is fully independent from Bayani, he cannot afford his education without at least some of the RESP proceeds or by incurring significant student loan debts.
• Bayani’s estate consists of the RESP, $100,000 in investments and some rare antiques, as well as $100,000 in taxes and debts. Most of Bayani’s assets, including the family home, were jointly held with Reyna, and so passed to her.

In this scenario, both Reyna and Hari face significant (and preventable) challenges.

The RESP would likely be considered terminated and become part of the estate. As a result, Reyna technically would be the beneficiary of the RESP proceeds, not Hari.

Further, the RESP proceeds, less the forfeited CESG portions, could conceivably cover the estate’s debts and taxes, rather than using joint assets, investments or the antiques. This would leave the investments available for Reyna and the unborn child, and she could always open a new RESP for her child with some of those assets.

Hari may accuse Reyna of acting in her own best interests, as he may feel she is using his money when the RESP is technically the estate’s asset to administer and distribute. This acrimony could have lasting consequences to their relationship as well as Hari’s relationship with his future half-sibling. Reyna may feel compelled or coerced to give Hari some of her own funds, including to compensate Hari for the CESG amounts lost as a result of the RESP termination.

In any event, while Hari may feel disadvantaged, his path to a clear legal remedy may not exist as an independent adult child in Alberta. To be a “family member” entitled to maintenance and support under Alberta law, Hari would need to either be under the age of 18 or already a full-time student under age 22. However, his unborn half-sibling would likely meet the definition of “family member” (see Wills and Succession Act, SA 2010, C. W-12.2, SS. 72(b)).

Hari may be incentivized to attack the validity of the will. While his odds of successfully proving his father’s will was invalid because of coercion or undue influence appear low, he would likely become a beneficiary of 25% of the estate if Alberta’s intestate succession provisions were activated because of a successful challenge (Wills and Succession Act, SA 2010, C. W-12.2, SS. 61(1)(b)).

Ultimately, this situation could easily have been mitigated had Bayani received qualified advice from an experienced tax and estate practitioner.

When a will names the executor as successor subscriber and provides them with adequate powers and authorities, the executor generally gains the power to administer the RESP as the original subscriber would have. A well-drafted RESP clause in a will can also direct the executor to maintain the RESP for the designated beneficiaries as a specific bequest in trust to those named beneficiaries or, in this case, to continue to administer the RESP for the benefit of Hari and any subsequent children of Bayani’s, allowing Reyna to maintain the RESP separately for Hari and her unborn child once born. (A child requires a social insurance number to be an RESP beneficiary.)

While Hari’s recourse may be limited in Alberta, if this occurred in another province, such as British Columbia, Hari could be entitled to seek remedy under that province’s more liberal wills variation provisions (Wills, Estates and Succession Act, SBC 2009, C. 13, S. 60). As a result, it becomes even more important to regularly confirm alignment between intention and documentation, particularly in blended families containing nuanced plans such as RESPs.

It is also important to note that changes in estate, family and tax legislation occur frequently. As a result, estate plans and designations should be reviewed with qualified professionals on a regular basis or any time there is a significant change to one’s life circumstances.

Matt Trotta is vice-president, Tax, Retirement and Estate Planning with CI Global Asset Management.

1 In some instances, an RESP contract may allow for an additional subscriber to be designated by the subscriber in a form acceptable to the promoter.