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For clients who opt for the family RESP, the key is allocating contributions to each beneficiary to ensure they maximize available grant money for each child. /iStockPhoto / Getty Images

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Registered education savings plans (RESPs) are a classic investment vehicle parents take advantage of for socking money away for their child’s post-secondary schooling, mostly to take advantage of the grant money. Financial advisors can add even more value by making sure clients choose the right type of RESP while also taking tax and estate planning strategies into account.

“I find that a lot of advisors usually just automatically go to a family plan when clients come to them with young kids, or they’re expecting their first child,” says Alysha To, senior financial planner, tax and estate planning at Richardson Wealth Ltd. in Vancouver. “But there are benefits to opening an individual plan, … so it really depends on the client’s situation.”

While a family plan can be beneficial, individual plans have a lot more flexibility, she adds.

With individual plans, the beneficiary doesn’t need to be related by blood or adoption to the subscriber, and the beneficiary can be changed at any time. In addition, the 31-year contribution timeframe is attributed to when the plan itself was opened rather than the actual age of the beneficiary.

Ms. To adds that if a client wants to combine individual RESPs into a family plan at a later date, they can do so without penalty provided the beneficiaries are related directly to the subscriber.

Individual plans can also be advantageous when there’s a large age gap between the children as family RESPs need to be wrapped up when the oldest beneficiary or the plan itself turns 31.

“The second child could be disadvantaged because what if they take a gap year or take longer to go through their post-secondary education? Are they under the [time] crunch to try and wrap it up sooner than they need to?” says Michelle Munro, director, tax and retirement research at Fidelity Investments Canada ULC in Toronto. “So, that’s when it might make more sense to have individual plans.”

When a family plan makes sense

For clients who opt for the family RESP, the key is allocating contributions to each beneficiary to ensure they maximize available grant money for each child.

Family RESPs are also ideal for parents who want all of their children’s education assets pooled into one account.

“A family RESP, for parents, gives that unit more options. You can easily add a second beneficiary to a plan upon the birth of a second, third, or subsequent child. And you just have one RESP to manage,” says Andrew Kirkland, president of Justwealth Financial Inc. in Toronto.

“The reason why you’d want to have multiple beneficiaries in one plan is that, say, for example, the first child doesn’t go to school or goes to a school where they don’t have to utilize the funds within the RESP fully, [then] any remaining amount could be used for the second beneficiary or the third.”

It’s all about viewing that RESP as providing educational resources to the family unit rather than to an individual person, he adds.

Justwealth employs an 18-year investment plan for RESPs that shifts the asset mix to become more conservative as the child gets older.

If there are multiple beneficiaries in the plan, Mr. Kirkland says the investment timeline will be tied to when the youngest child turns 18 years old so that child doesn’t miss out on potential investment growth.

“We have a lot of people join us and like that type of solution because they don’t have to worry about being exposed to the markets significantly when they’re going to start needing the money,” he says.

“The last thing people want to be doing is taking money out when they’re exposed to the market and it drops – it’s just not a good situation.”

Many plan subscribers might be inclined to contribute only up to $2,500 per year as that’s the maximum amount the government will match with its 20-per-cent Canada Education Savings Grant. However, Ms. To of Richardson Wealth says she often reminds clients that contributing beyond that amount will allow them to further reap the benefits of long-term compounding.

“They don’t realize you could contribute up to $50,000 per beneficiary, and this really does compound and grow within the plan,” she says. “That income is shifted over to the beneficiaries.”

Tax and estate planning around RESPs

Aside from ensuring clients are choosing the right type of RESP accounts and maximizing their contributions, Ms. Munro says tax and estate planning should also be taken into consideration.

Upon withdrawal, the grant and investment growth income portions of the RESP money are taxed in the hands of the beneficiary, which typically can have minimal tax implications for students with little to no income. That could change if the beneficiary has a summer job or a co-op placement, for example.

“That’s where advisors can add value and help clients think about how much to pull out. When do you pull it out? What is the student’s tax rate?” Ms. Munro says.

“We want to make sure that when they make that withdrawal, the [education assistance payment] – the taxable portion – is getting taxed at that low or no tax rate, which students are in typically, but not always.”

Advisors should also discuss naming a successor subscriber for the RESP with clients, she says.

“In the absence of having a joint subscriber, or in the absence of listing something in a will, it becomes part of [the client’s] estate, which basically means the RESP has to be wound up, and that could not be their intention,” Ms. Munro says.

The key message is to ask clients if the RESPs are included in their estate plan, what their intentions are for them, and whether they’re documented in their wills, she says.

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