The article “Can an estate contribute to an RESP account?” was originally published in MoneySense on December 20, 2022. Photo by Ketut Subiyanto form Pexels.
Here’s what you need to know before deciding to leave money in trust for an RESP account after your death.
“Can money left in a will to be put in a trust fund for a child under 18 be put into an RESP?” Paula
Using a trust to contribute to an RESP
A registered education savings plan (RESP) is a great way to save for post-secondary education. RESP contributions of up to $2,500 per year attract a 20% contribution from the government called a Canada Education Savings Grant (CESG). Low-income families who contribute to an RESP may also qualify for a $500 Canada Learning Bond or other provincial government incentives.
In your will, you can leave instructions to divide your estate among different adult and minor beneficiaries. Assets left to minor beneficiaries are generally held in trust until those beneficiaries attain the age of majority, but trusts can hold funds beyond that age, or they can be used to hold back an estate and distribute it over time to adult beneficiaries.
When you leave money for minor beneficiaries, Paula, you can leave explicit instructions, or those instructions can be more open to interpretation. Many wills include discretionary trust wording like the following, taken directly from an actual will:
My Trustees shall set aside one equal share for each child of mine who shall be living at my death, and shall keep such share invested and the capital and the whole of such part of the net income derived from such share or from the part thereof from time to time remaining in trust as my Trustees in their uncontrolled discretion consider advisable shall be paid to or applied for the benefit of such child, and to educate or advance him or her in life or defray the cost of an accident, illness, or other emergency.
A clause like this gives flexibility to a trustee who is appointed to manage a testamentary trust in a will to use the funds for a beneficiary as they see fit.
Who can open and own an RESP account?
Although it may seem prudent to use a trust to contribute to an RESP for a minor child who is a beneficiary of that trust, it may not be an option. The reason is two-fold.
First, an estate cannot open a new RESP account. According to Canada Revenue Agency, “An estate is defined as a trust under the [Income Tax] Act. The Act’s definition of ESP excludes a trust from being party to the contract.”
Second, the owner of an RESP account is the subscriber, not the beneficiary. So, the person who opens the account owns it and can withdraw the money for any purpose at any time. The child beneficiary cannot demand the money, even once they’ve attained the age of majority. It does not belong to them.
As such, Paula, a testamentary trust may not be able to open an RESP account and may not be able to contribute to an RESP owned by someone else if trust funds can only be paid to the beneficiary or spent on their behalf according to the terms of the trust.
That said, some financial institutions allow the initial RESP subscriber to name a successor subscriber to take over the account in the event of their death. In this case, a living subscriber may be able to appoint a testamentary trust as the successor subscriber for their RESP account.
What role does a trustee play?
In addition, while preparing a will, a testator could dictate that their trustees use funds held in trust for beneficiaries to contribute to an RESP intended for those beneficiaries. For example, Paula, a grandparent could include terms in their will directing their trustees to contribute to an RESP account owned by their grandchild’s parent (the child of the deceased).
It is worth noting that if an RESP account is owned by someone who dies and there is no successor subscriber named, the account may need to be closed, be subject to probate, require repayment of government grants and bonds, be partially taxable, and/or need to be distributed based on the terms of their will.
Not all RESP contracts allow the naming of a successor subscriber. Some may allow an executor to designate a successor subscriber. Some people appoint a successor subscriber for their RESP directly in their will.
So, here is what I think you need to do, Paula:
1) If you are the subscriber for an existing RESP, check to see if you can name a successor subscriber with the financial institution.
2) If you cannot, consider adding a codicil (an adjustment or supplement) to your existing will or preparing a new will to appoint a successor subscriber for an RESP in the event of your death.
3) Consider adding a codicil to your existing will or preparing a new will to direct your trustees to make contributions to an RESP for the child beneficiary.
You should seek advice from the lawyer who drafted your current will or from a new estate lawyer who can prepare a new will and make sure your wishes will be carried out upon your death.
Contributing more than the RESP contribution limit
It also bears mentioning the $2,500 annual contribution limit for RESPs only applies to the government grants. The government grant of 20% of your contributions is limited to $2,500 in contributions per year (or $500). It also applies on up to $2,500 in additional contributions missed in past years (for a maximum grant of $1,000 in any given year).
But there is no restriction to contributing more to an RESP in a single year. The only limit on RESPs is a $50,000 lifetime limit for the beneficiary, regardless of how many RESP accounts are opened for them.
A simple alternative depending on your circumstances, Paula, could be to pre-fund the remaining lifetime contribution limit now or direct your executors to do so in your will, so no ongoing annual obligations would apply.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.