The RESP has become a staple in many Canadians’ financial plans. Contributions of up to $50,000 per beneficiary and tax-sheltered growth make the RESP an ideal savings vehicle for a future student’s education. Add in federal (and in some cases provincial) grants (and bonds if applicable), and RESPs can be a large asset for many Canadians.

While 2024 marks the 50th anniversary of the original RESP, estate planning for RESPs isn’t commonly discussed. Not planning for an RESP upon the owner’s death may create unwanted consequences, including winding-up the account, forfeiting the grants (and bonds if applicable), and even an additional 20% tax on the growth. You can help your clients avoid all this with proper planning in their wills.

An RESP is a contract, not a formal trust for the beneficiary

The Income Tax Act (ITA) allows someone, known as the subscriber, to open an RESP with a promoter. The promoter is usually a financial institution or organization. The account is a contract between the subscriber and the promoter that allows the subscriber to:

  • name a beneficiary of the plan (a future student),
  • direct contributions to the plan, and
  • instruct the promoter on how to pay money from the plan.

Some people think that money inside an RESP is the named beneficiary’s property, or that RESP money is held in a formal trust for the beneficiary. Despite the word “beneficiary” being used to describe a future student, neither is true.

These misconceptions cause many people to overlook RESPs as part of their estate plans. Clients may assume the RESP will transfer to the beneficiary through their estate. Or they may believe their estate trustee will continue to hold the account until the beneficiary requires the funds. Unfortunately, neither of these is likely without proper planning in a client’s will.

Money inside an RESP remains property of the plan subscriber during their lifetime. The subscriber as owner of the account directs the promoter on how to pay out money. Withdrawals are subject to contract provisions.

Most RESPs allow the subscriber to withdraw original contributions tax-free at any time for themselves. The subscriber may also direct the promoter to pay contributions, growth and grants (or bonds if applicable) to the beneficiary. When a withdrawal is qualified as an educational assistance payment (EAP), the beneficiary receives and pays tax on the growth and grants (and bonds if applicable) at their marginal tax rate. If a beneficiary doesn’t pursue a qualified education program, grants and bonds are forfeited and returned to the government. They can be withdrawn only as an EAP.

The subscriber may direct the promoter to pay an accumulated income payment (AIP) upon meeting certain conditions. An AIP consists of growth not paid in the form of a qualified EAP. It’s subject to tax at the subscriber’s marginal tax rate and the additional 20% tax mentioned above. An AIP is essentially a last resort withdrawal typically done when a beneficiary doesn’t use the funds for their education. Importantly, these payments often arise when a subscriber dies and the RESP needs to be wound up.

RESPs as an estate asset

Other than for family plans, the ITA doesn’t restrict who qualifies as an original subscriber. However, the ITA does restrict who can become a subscriber in the event of the original subscriber’s death.

From an estate planning perspective, the issue comes down to ownership. Only spouses or common-law partners can be joint subscribers. This limits the ability to transfer an RESP outside the estate through right of survivorship (where applicable). Since the original subscriber owns the RESP, the account forms part of their estate assets. Without direction, an RESP falls to the general residue of the estate. The executor or administrator of the estate then administers the RESP under the terms of the will. To avoid issues, clients can include specific terms in their will to guide the executor regarding the RESP.

Naming a successor subscriber for an RESP

The ITA allows an RESP to transfer to a successor subscriber upon death of the last sole subscriber. This transfer can be to:

  • the ultimate beneficiary of the RESP;
  • another individual the subscriber trusts to hold the RESP for the benefit of the ultimate beneficiary; or
  • the subscriber’s estate or a testamentary trust with directions in their will to hold the RESP for the ultimate beneficiary’s benefit.

The promoter may also restrict transfers of an RESP depending on the terms of the contract.

Each choice has its own considerations. For example, transferring the RESP to another person is simple and clean. However, the RESP then becomes their asset. They have the same ability as the original subscriber to give directions to the promoter. This includes decisions on withdrawing money or directing it to the ultimate beneficiary.

Naming the subscriber’s estate or a testamentary trust allows the original subscriber to retain more control through trust instructions. This includes the ability to instruct the executor/trustee on how to maintain and direct money from the RESP. However, reporting and filing obligations for trusts may make this unattractive for some, depending on the RESP value.

To assist a smooth transition, RESP subscribers can consider adding further directions in their wills, such as the following:

  • Ability for executor to transfer assets in kind to the successor subscriber or beneficiary of the estate. This allows them to transfer the RESP instead of winding it up and having it fall to the estate’s residue, which would likely result in forfeiting the grants and bonds.
  • Instructions for maintaining and distributing the RESP for the benefit of the ultimate beneficiary. This could include provisions in the event the beneficiary doesn’t attend a qualifying education program. This could also include direction on how to pay out an AIP to avoid the 20% additional tax. You can avoid the 20% additional tax by transferring the AIP to the subscriber’s (or their spouse’s or common law partner’s) RRSP, pooled registered pension plan or specified pension plan, if they have available contribution room.
  • Flexibility to transfer RESP assets to another RESP. Or to transfer the RESP money to a Registered Disability Savings Plan (RDSP) for the same beneficiary, if applicable. Note that you forfeit grants and bonds when transferring RESP money to an RDSP.
  • Discretion to continue contributions to the RESP from other estate assets. Without direction, an executor likely can’t use estate assets to fund an RESP. It would amount to giving estate assets to the successor subscriber.
  • Methods for integrating the RESP distribution with the overall estate plan. The subscriber may have more than one RESP of different values. Or they may have several beneficiaries of the estate and need to include direction to equalize the estate — for example, if one beneficiary receives an RESP and the other doesn’t.

What if no will exists?

If the original subscriber dies without a will, a court appointed administrator oversees the estate under provincial intestate laws. These laws do not contemplate specific rules for transferring an RESP; therefore, the RESP forms part of the general residue to meet estate obligations. This makes maintaining the RESP for the ultimate benefit of a future student more difficult.

For example, the recipient needs to be entitled to a portion of the estate under intestate laws. The value of the RESP needs to be equal to or less than their intestate law entitlement. If the recipient isn’t the future student, they need to then maintain the account for the ultimate beneficiary. They have free rein to provide the promoter with direction to distribute the money from the RESP; this may not match the original subscriber’s intentions for the account.

An RESP may not be the largest asset of a client’s estate; however, dealing with the account as part of an estate can become complicated very quickly, thwarting your client’s plan for the RESP money. Guiding clients to properly deal with an RESP in their estate plan may be the best advice you give. You can recommend they specifically mention the RESP to the drafting lawyer when they create or update their will. In the end, your recommendations can help avoid unnecessary cost or delay and ensure their plan stays on track.

R. Paul Thorne is director of advanced planning with Sun Life Financial.