In Ontario, a Registered Education Savings Plan (RESP) does not automatically belong to the grandchild when the grandparent (the subscriber) passes away. If the Will does not name a ‘successor subscriber’, the RESP falls into the deceased’s estate. If the executor is forced to collapse the account, all federal CESG grants must be returned to the government, causing a massive financial loss.
Many loving grandparents choose to invest in their grandchildren’s future by opening a Registered Education Savings Plan (RESP). It is a wonderful way to save for university or college while taking advantage of generous federal government grants. However, a massive estate planning crisis often occurs when the grandparent passes away unexpectedly.
Unlike an RRSP or a Life Insurance policy, an RESP does not bypass the estate just because a grandchild’s name is on it as a beneficiary. 📍 Under Ontario law, the grandparent who opened the account (the subscriber) actually owns the funds. Whether you are managing an estate in Toronto, Ottawa, or Markham, failing to handle an RESP correctly can result in massive tax penalties from the CRA and the loss of thousands of dollars in educational grants. Browsing our directory to find a skilled estate lawyer can help you navigate this complex financial trap.
Step-by-Step Process for Executors in Ontario
As the Estate Trustee, you have a strict fiduciary duty to manage the deceased’s assets carefully. Dealing with an RESP requires understanding both the deceased’s Will and strict Canada Revenue Agency (CRA) rules. Here is how most law firms advise executors to proceed.
Step 1: Review the Will for a Successor Subscriber
The very first step is to carefully read the deceased’s Last Will and Testament. A properly drafted Will should contain a specific clause naming a ‘Successor Subscriber’—usually the parents of the grandchildren.
If a successor subscriber is explicitly named, that person simply takes over the account. 👤 They assume all the rights to manage the investments and distribute the funds when the grandchild enrolls in post-secondary education. The RESP bypasses the estate entirely and is completely saved.
Step 2: Check for a Joint Subscriber
If there is no specific clause in the Will, look at the original banking documents. Was the RESP opened jointly with a spouse? In Canada, spouses and common-law partners can be joint subscribers.
If the deceased grandparent opened the RESP jointly with their spouse, the surviving spouse automatically becomes the sole subscriber. 💍 The account continues to operate normally, protecting all the government grants.
Step 3: Determine if the RESP Falls into the Estate
If there is no joint subscriber and no successor named in the Will, the RESP legally falls into the ‘residue’ of the estate. This is the worst-case scenario for an executor in Ontario.
Because the RESP is now an estate asset, its full cash value must be declared on the probate application, and the estate must pay the 1.5% Estate Administration Tax on it. 💰 Furthermore, the executor must now decide what to do with the account, which is heavily dictated by how the Will divides the overall estate money among the beneficiaries.
Step 4: Making the Choice: Maintain or Collapse?
If the RESP is in the estate, the executor has two primary options. If the Will grants the executor broad trust powers, they can potentially keep the estate open and maintain the RESP until the grandchild goes to school. However, this is administratively exhausting.
The alternative is to collapse (close) the RESP. If you collapse the account, all Canada Education Savings Grants (CESG) are immediately clawed back by the federal government. 🚨 The original contribution amounts are returned to the estate tax-free. However, the investment growth (the Accumulated Income Payment) is heavily taxed unless there is room to roll it into the deceased’s spouse’s RRSP.
How Much Does it Cost in Ontario?
Mishandling an RESP creates severe tax consequences, making professional legal and accounting advice a critical investment.
- Estate Administration Tax: If the RESP falls into the estate, Ontario charges roughly 1.5% on the total value of the account as a probate fee.
- CRA Tax Penalties: If collapsed, the investment growth is subject to the deceased’s regular income tax rate plus an additional 20% penalty tax under CRA rules.
- Legal Consultation: Having an estate lawyer draft a Will with a proper successor subscriber clause costs about $500 CAD to $1,000 CAD—a small price to avoid losing thousands in grants.
| Scenario After Death | What Happens to the RESP? | What Happens to the Government Grants? |
|---|---|---|
| Successor named in Will | Transfers to the successor seamlessly | Grants remain safely in the account |
| Joint Subscriber survives | Transfers to the surviving spouse | Grants remain safely in the account |
| No successor, Account Collapsed | Cash returns to the estate | 100% of grants are clawed back by the CRA |
How Long Does the Process Take?
If a successor subscriber is named, the transfer paperwork at the bank usually takes 2 to 4 weeks to process. ⌛ If the RESP falls into the estate, you cannot touch the funds until the Ontario Superior Court of Justice grants probate, which currently takes 2 to 6 months depending on your local courthouse.
Frequently Asked Questions (FAQ)
Does the grandchild get the money directly when the grandparent dies?
No. The beneficiary (the grandchild) has no legal right to control the RESP or demand the money. The subscriber owns the account. If the subscriber dies, ownership either passes to a named successor or falls into the estate to be distributed according to the Will.
Can the executor just name the parents as the new subscribers?
No. An executor cannot arbitrarily name a successor subscriber after death if the Will does not specifically grant them the power to do so. This is why having a properly drafted Will by an Ontario lawyer is absolutely crucial.
What happens if the RESP is collapsed and the estate has multiple beneficiaries?
If the RESP is collapsed and becomes part of the estate residue, the remaining cash (after taxes and grant clawbacks) is divided among all the beneficiaries named in the Will. The grandchild may end up receiving nothing if they are not listed as a primary beneficiary of the estate residue.
Can the estate keep contributing to the RESP?
If the executor decides to maintain the RESP within the trust of the estate, they generally cannot make new contributions using estate funds unless the Will explicitly directs them to do so. Their role is strictly to preserve the existing assets.
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