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RESP contributions grow tax-deferred and are eligible for government grants and bonds. Withdrawals are partially taxable and partially tax-free. The taxable portion can be taxed to the post-secondary student, who may pay little to no tax on the income.
Should you give your children money to contribute to an RESP?
Some grandparents choose to contribute by giving money to their children for their grandchildren’s RESP. This can be preferable—for example, if the grandparent wishes to benefit their grandchildren without being responsible for managing the account. This approach can also help families avoid the risk of overcontributing to the account (there is a $50,000 lifetime limit per beneficiary) or making contributions that do not qualify for government grants (typically $2,500 in contributions for the current year, and up to $2,500 for a previously missed year, are eligible).
In your case, Bill, there can be complexities if the RESP makes up part of your estate. Your grandchildren could still be attending post-secondary school in 15 years, and you would be in your 90s. Hopefully, you will be there to see them graduate. But as you allude to, you never know.
Joint RESP accounts
You mention that you have a joint RESP. I think what you mean is that you have a family RESP that is for both grandchildren. I like this approach as it allows for more flexibility for siblings. The account can be used for either child in different increments. One may have more expensive schooling than the other, or one may not pursue post-secondary education at all.
Some providers allow you to open a joint RESP account, meaning one that has two subscribers. (A subscriber is someone who opens an RESP on behalf of a beneficiary.) This can be convenient for administrative purposes, but also from an estate planning perspective. Typically, only spouses or common-law spouses—including former spouses—can be joint subscribers, though.
Naming a successor subscriber
Depending on the financial institution, you may be able to name a successor subscriber for an RESP account. This person takes over the account if the original subscriber passes away. You should check, Bill, to see if you can name a successor subscriber for your grandchildren’s RESP account. This option is not available to Quebec residents.
If not, the RESP account could become part of your estate, and you may have to pay probate fees as well as income tax on the growth of the contributions. You may also have to repay the government grants and bonds.
Even if you cannot name a successor subscriber at the financial institution where the RESP is held, you may be able to do so in your will. The account could then be transferred by your estate to your child, who would continue to manage the account for your grandchildren.
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Jason Heath, CFP
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