Registered Education Savings Plans (RESPs) are a popular investment vehicle in Canada, designed to help parents and guardians save for their children’s post-secondary education. However, when the subscriber of an RESP passes away, managing the account can become a complex process for beneficiaries and executors. Understanding the rules governing RESPs after death is essential to ensure the funds are handled appropriately and the deceased’s intentions are honored.
This guide explores the key steps and considerations for handling RESPs after a subscriber’s death, including options for transferring, collapsing, or maintaining the account.
What is an RESP?
An RESP is a tax-advantaged savings plan that allows contributions to grow tax-free. It is specifically intended for a beneficiary’s education and can include government grants like the Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB). Key features of an RESP include:
- Subscriber: The individual(s) who open and contribute to the RESP.
- Beneficiary: The individual for whom the funds are intended, typically a child or grandchild.
- Grants and Bonds: Additional contributions from the government based on the subscriber’s contributions and income level.
What Happens to an RESP After the Subscriber’s Death?
The fate of an RESP depends on several factors, including the type of RESP, whether there is a joint subscriber, and the instructions outlined in the deceased’s estate plan. Here are the possible scenarios:
1. Joint Subscribers
If the RESP has joint subscribers (e.g., both parents), the surviving subscriber can continue to manage the account without interruption. The RESP remains active, and contributions, grants, and withdrawals can proceed as usual.
2. Single Subscriber Without Successor Designation
If the RESP was opened by a single subscriber and no successor was designated, the RESP becomes part of the deceased’s estate. The executor must decide how to manage the RESP in accordance with the will and applicable laws.
3. Successor Subscriber Designation
Some RESP providers allow subscribers to name a successor who will take over the account upon their death. This simplifies the transition process and ensures the RESP continues to operate as intended.
Steps for Handling an RESP After Death
Step 1: Notify the RESP Provider
The executor should contact the RESP provider to inform them of the subscriber’s death. Provide necessary documentation, such as:
- The death certificate
- Proof of executor status (e.g., probate documents or a copy of the will)
- Identification for the executor
Step 2: Review the RESP Agreement
Examine the terms of the RESP agreement to understand:
- Whether a successor subscriber was designated
- Rules regarding contributions, withdrawals, and account closure
- Implications for government grants and bonds
Step 3: Determine the Best Course of Action
Depending on the circumstances, the executor and beneficiaries may choose to:
- Maintain the RESP: Transfer the account to a successor subscriber or continue managing it through the estate.
- Collapse the RESP: Withdraw the funds and close the account.
- Transfer the RESP: Transfer the RESP to another eligible plan or subscriber.
Step 4: Address Tax Implications
RESPs have unique tax rules that apply after the subscriber’s death. The executor should work with a tax advisor to:
- Determine the tax treatment of contributions, grants, and income within the RESP.
- Avoid penalties or clawbacks related to government grants.
- Report any taxable income on the estate’s or beneficiaries’ tax returns.
For more information, visit the Canada Revenue Agency’s (CRA) RESP Guide.
Options for Managing an RESP
1. Maintaining the RESP
If a successor subscriber is named or the beneficiaries wish to continue the RESP, the account can remain active. This option allows:
- Contributions to continue (if permitted by the RESP agreement).
- The beneficiary to use the funds for education as planned.
- Preservation of government grants and tax-deferred growth.
2. Collapsing the RESP
If the beneficiaries no longer require the RESP, it can be collapsed. The process involves:
- Returning Government Grants: Any unused CESG and CLB must be repaid to the government.
- Taxable Withdrawals: Investment income within the RESP is taxed as Accumulated Income Payments (AIPs), subject to regular income tax and an additional 20% penalty unless transferred to an RRSP.
- Returning Contributions: Subscriber contributions are returned tax-free to the estate or beneficiaries.
3. Transferring the RESP
RESPs can sometimes be transferred to another eligible account or subscriber. This option may preserve government grants and avoid penalties. Work with the RESP provider to explore transfer options and ensure compliance with CRA rules.
Key Considerations for Executors
Grant Repayment Rules
Government grants like the CESG and CLB must be repaid if the RESP is closed without the beneficiary using the funds for education. Ensure the estate has sufficient funds to cover these repayments.
Beneficiary’s Education Plans
Discuss the RESP with the beneficiary to understand their educational goals. If they plan to pursue post-secondary education, maintaining the RESP may be the best option.
Timing of Withdrawals
RESP withdrawals must align with the beneficiary’s enrollment in a qualified educational program. Keep track of deadlines and requirements for Educational Assistance Payments (EAPs).
Provincial Estate Laws
Estate laws vary across provinces and may impact how RESPs are managed. Consult an estate lawyer to navigate provincial regulations. For example, review Ontario’s Estate Administration Guide or Alberta Estate Law Resources.
Tax Implications of RESP Management
RESPs are subject to unique tax rules that affect subscribers, beneficiaries, and estates. Key considerations include:
- AIP Taxation: Investment income withdrawn as AIPs is taxed at the subscriber’s marginal rate plus a 20% penalty unless transferred to an RRSP.
- Grant Clawbacks: Unused grants must be repaid to the government upon account closure.
- Educational Withdrawals: EAPs are taxable to the beneficiary but often result in minimal taxes due to their lower income.
For detailed tax guidance, consult a financial advisor or refer to the CRA’s RESP Tax Rules.
Challenges and Solutions
Common Challenges
- Lack of successor subscriber designation
- Uncertainty about the beneficiary’s education plans
- Complex tax rules and grant repayment requirements
- Navigating RESP provider policies
Solutions
- Consult Professionals: Work with estate lawyers, financial advisors, and tax specialists to address challenges.
- Communicate with Beneficiaries: Discuss the RESP’s purpose and options with the beneficiary to align decisions with their needs.
- Act Promptly: Delays in managing an RESP can lead to penalties or missed opportunities for educational funding.
Handling an RESP after the subscriber’s death requires careful consideration of financial, legal, and tax implications. Executors must navigate RESP agreements, government rules, and beneficiary needs to make informed decisions. Whether maintaining, collapsing, or transferring the RESP, understanding the options ensures the funds are managed effectively and the deceased’s intentions are honored.
For more information and resources, visit the Canada Revenue Agency’s RESP Guide or consult with RESP providers and estate professionals.
