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Monday, May 17, 2010

Don't make this common mistake with your RESP

RESPs are a popular way for parents and grandparents to save for a child's education. The government matches a portion of the contributions put in by the owner of the plan, making the plan grow nicely.

Sometimes the parent or grandparent dies while the money has not yet been used by the child and is still in the plan. The problem is that most people misunderstand where the money is going to go at that point and this results in disappointment, delays and lawsuits.

Most people incorrectly compare the RESP to the more familiar RRSP. We know that if we name somebody (a beneficiary) in our RRSP, on our death the named beneficiary gets the money in the RRSP. On the face of it, an RESP looks similar because it also names someone, namely the child whose education is being saved for. It appears that on the death of the person who owns the RESP, the child should get the money in the plan. But it doesn't work that way.

If a person is the only owner of an RESP , he or she is also the director of the RESP, that is, the person who makes decisions about how and when the money will be paid out on behalf of the child. Most people don't think to name anyone else as an alternate director. If the owner/director then passes away, the money still belongs to him or her and not to the named child. The RESP will then be an asset of the estate and will be divided according to the deceased person's Will, or if there is no Will, according to provincial intestacy laws.

If the RESP goes back into the estate, the portion of the money that is made up of government contributions over the years must be repaid to the government. The child won't get anything.

At this point, the child's parent or other guardian will usually protest that another director can easily be found, but the executor is not allowed to give away estate money other than as directed under the Will. If the child is not one of the beneficiaries under the Will, then the executor, who must always do what is in the best interests of the estate, can't decide to ignore the Will and pay the child anyway.

The easiest solution is to name an alternate director or a joint director at the time you set up the RESP account.

Another simple solution is to name someone as a director of your RESP plan in your Will. This is something that an experienced Wills and Estates lawyer would think to ask anyone who has school-aged children.

This is one (or should I say one more) reason that I am not a fan of home-made Wills. It's just so easy to leave out something that you have no idea would help you. If you have an RESP, check it to see whether you are the only owner on the plan. If so, do something about it.

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