A common misconception is that an RESP is actually a trust, and upon the death of the subscriber, the assets comprising the RESP will be held in trust for the benefit of the beneficiaries identified in the contract between the subscriber and the promoter.
Because of this misconception, many people imagine that they do not need to worry about the disposition of their RESP assets upon their death. Not correct.
In fact, upon the death of the sole subscriber or the surviving joint subscriber, the RESP becomes an asset of his or her estate and is subject to the terms of the deceased subscriber’s will. In addition, an RESP remains an asset of the estate for the purposes of creditor claims and calculation of estate administration taxes.
Typically the contract with the promoter is binding on the subscriber’s personal representatives. However, the fact that the RESP contract is binding on the subscriber’s personal representatives does not necessarily mean the personal representatives assume all of the rights of the subscriber with respect to the RESP. It may be that the contract provides that only the right to manage the RESP will flow to the personal representatives. In such a circumstance, the personal representatives would not be allowed to add or change beneficiaries, to make withdrawals, or to direct EAPs to or for the benefit of assisting a beneficiary to further his or her education at a post-secondary school level, without taking some further steps (such as making a contribution to the RESP) in order to acquire full rights as a succeeding subscriber.
It is therefore important to review the contractual terms of the RESP to determine, among other things, whether it:
(1) permits the subscriber to name a succeeding subscriber;
(2) imposes any requirements on the succeeding subscriber to make a contribution to the RESP in order to assume the full rights of the subscriber with respect to the RESP; or
(3) provides that the subscriber’s personal representatives become the succeeding subscribers.
The contractual terms of the RESP should also be reviewed in order to determine whether there are any further restrictions imposed on succeeding subscribers with respect to any other matters regarding the RESP, including the ultimate distribution of the assets of the RESP.
In short, a review of the contractual terms of the RESP is necessary to determine whether the contract provides for any other person (including the estate of a deceased individual) to acquire the deceased subscriber’s rights under the RESP and thereby become the new subscribers of the RESP for the purposes of the ITA.
This information is based on a chapter written by Laura West in British Columbia Estate Planning and Wealth Preservation.