Death, Divorce, and Bankruptcy
There is a wise old saying – “Hope for the best, but plan for the worst.” In other words, sometimes in life the unexpected can happen, including such things as death, divorce, and bankruptcy. The following section outlines the potential outcomes of these unexpected events as they can impact your RESP.
When it comes to your RESP, the death of either the subscriber or the beneficiary has implications.
In the event that a subscriber dies, there are a number of options available:
- First, if your RESP plan has more than one subscriber, the surviving subscriber remains the sole subscriber (unless you live in the province of Quebec where your executor would become the subscriber).
- Second, if your RESP plan did not have a surviving subscriber and your Will doesn't appoint one, the RESP will be collapsed and the money you have saved in the plan will become part of your estate, distributed according to your Will, and government contributions will have to be repaid.
Note: Your executor may have the option to become the subscriber with the authority to continue the plan. Your executor also retains the authority to appoint a new subscriber to the RESP plan. The newly appointed subscriber becomes a replacement subscriber for the RESP plan. As a replacement subscriber you are considered to have made all contributions to the plan. As such, you may be responsible for any excess contribution taxes payable after 1997 on excess RESP contributions in the months following the change in subscribers. And as a replacement subscriber, you will be responsible for any future Accumulated Income Payments (AIPs) that result in the future. You cannot reduce the AIP payments that are subject to taxation if you become the subscriber because of the death of the original subscriber.
Note: If the RESP does not already have a surviving joint subscriber consider appointing a successor subscriber of the plan within your Will. For a greater discussion on the topic of appointing successor subscribers, read RESPs and Estate Implications.
In the event that a beneficiary dies, there are few possible outcomes, including the following:
- If there are no surviving beneficiaries, you may be able to appoint another qualifying beneficiary. But if there are no qualifying beneficiaries in the family, then you may have to terminate the plan altogether.
- For Family RESP plans that have surviving beneficiaries, the death of a beneficiary has no impact on the plan. The surviving beneficiaries may benefit from all the subscriber’s contributions, plus the CESG grants received, up to the lifetime CESG limit of $7,200.00 per beneficiary.
In the event of a divorce, a spouse or former spouse can replace the original subscriber of an RESP, if the separation or divorce is recognized by a decree, order or judgment. In the case of separation or divorce, RESP assets are not required to be divided between the parties. Consequently, a spouse and a former spouse can continue to be joint subscribers under an RESP. It is good to remember that it is the spousal status of the joint subscribers at the time they enter into a contract that is important.
Note: Individuals who are already divorced would not be permitted establish an Individual RESP as joint subscribers.
In the event of bankruptcy,subscribers and beneficiaries should seek legal advice concerning the assets held within an RESP account.