My neighbour, Ian, is getting a little frustrated with his son. You see, Jack is now 22 and still hasn’t applied to attend a post-secondary school. Jack’s been out of high school for over three years and still insists he’ll enroll in university when he’s ready.
“By the time you decide to go to university, Jack,” Ian proclaimed, “I’m going to be six feet under.”
I began thinking about that statement. “Ian, if you’re going to pass away like that, make sure you revise your will first – to deal with the RESP you’ve set up for Jack,” I explained.
I know for a fact that Ian established a registered education savings plan (RESP) for Jack many years ago. And like so many other RESPs, the total value is becoming significant now.
Ian recognized that RESPs offer three key benefits: (1) a deferral of tax that results because the income earned inside the RESP is not taxed annually, allowing for tax-sheltered compounding; (2) a splitting of income that results when the income inside the RESP is taxed in the hands of the beneficiary (student) when withdrawals are made, and; (3) Canada Education Savings Grants (CESGs) of up to $500 for each year are paid into an RESP when contributions are made for an eligible child.
The fact is, however, that most Canadians who have established RESPs have not given thought to what happens if they should pass away before the beneficiary has used the assets of the RESP for post-secondary education.
THE RULES
No doubt about it, there’s some confusion as to how RESPs are treated upon the death of the subscriber (the “subscriber” is the person who set up the RESP and has been making contributions). Many people think that RESPs are treated the same as registered retirement savings plans (RRSPs) upon death – but that’s not true.
