RESPs Part 3: Understanding Subscriber and Beneficiary

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One of the biggest unknowns when starting up an RESP is whether or not the child will actually go on to post secondary school. Perhaps the child will become a prodigy like Bill Gates and invent something out of the garage. Or perhaps they will become a superstar athlete and forgo the standard education. What makes it difficult is that putting money in an RESP could be taking away from other investments that the money could be used for like retirement.

So what really happens to the money in the RESP? Who does the money actually belong to when it sits there being invested? To really understand the answers to these questions, it’s important to understand the relationship between a subscriber and a beneficiary.

The Subscriber

Anyone is allowed to open an RESP account for a child. This could be a parent, a grandparent, or even a relative who wants to take charge in investing for the child’s future. The most important thing to know when opening an RESP account is that the subscriber is the person who legally owns the funds.

Despite a popular belief that the money belongs to the child or beneficiary that is completely false. Up until the point when the beneficiary actually withdraws the money for educational purposes the money belongs to the subscriber.

What does this mean? It means if your sister or mother opens an RESP account for your children, when you contribute to the account you are actually legally giving the money to your sister or mother. That’s where you want to consider what the conflict of interest might be by having a relative or even a friend open an RESP account for your child.

Although most parties will always have the child’s best interest in mind, the subscriber has the legal right to withdraw any contributions without consent to anyone who has actually contributed money to the RESP account. Imagine if your relative took the money out to buy a new house without your consent? Wouldn’t you be outraged? Don’t let that happen to you. Make sure all parties are in agreement and consent to who should be the manager of the money. You don’t want to ruin relationships because of poor financial planning.

If for any reason the subscriber should change, there must be written consent before that can happen. For these legal reasons it’s very important to determine who should be the subscriber before opening the RESP account.

When opening individual accounts, anyone can be a subscriber. They don’t even have to be a relative. A family RESP account though, must be opened by someone who is considered a blood relative or an adoptive parent of the beneficiaries.If so desired, a partner or spouse can enter into a joint subscriber plan where both individuals are subscribers of the account. This may make the most sense for those looking for equal rights to the funds.

The Beneficiary

For individual RESP accounts anyone can become the beneficiary of the RESP. Remember that the RESP is just a tax free vehicle to save for education. The government doesn’t discriminate against age. If you want to save to go back to university when you’re 50, you can use the RESP to do that. Don’t let anyone tell you that you can’t learn at an older age!

The only difference when you contribute to an RESP when you’re older is that you don’t qualify for the grants that the Canadian federal government offers.

If you have multiple children, it is possible to open up a Family RESP plan. With family plans the beneficiaries must be under the age of 21 when the account is setup for the individual. So long as the child is entered into the plan before the age of 21, they are still eligible to use the funds in the RESP even if they go to school at a later age.

The beneficiary is ultimately the person that will be allowed to withdraw the funds when they go to post secondary school. That’s as simple as it gets. When the money is withdrawn, it’s the beneficiary that will pay the taxes on the withdrawn amount, similar to how an RRSP is taxed on withdrawal. Only when money is withdrawn, is the money now in the hands of the beneficiary. Any moment before that and the money still belongs to the subscriber.

Individual Plans

Individual RESP plans can be opened by anyone for any child. Just remember that the subscriber is the owner of the funds. Having individual RESP funds makes it much simpler to manage the funds. It’s much easier to calculate if you are approaching the maximum $50,000 threshold, or whether all the grants have been received for the beneficiary since all the funds in the account belongs to one child.

Even if you have multiple children, you can open individual RESP account for each child to track contributions separately. In the event that one of the children decides to not attend post secondary school, it’s possible to transfer any outstanding amounts to another child by merging the two individual RESP accounts together. You will just have to take note that the contribution limits and grant maximum are not exceeded.

Since individual accounts can be opened by anyone and the same beneficiary can have multiple accounts, it’s important to track the contribution and grant limits across all active accounts. Grandparents, aunts and uncles who may have accounts for their relatives will all contribute to the entire contribution limit and grant money for that single beneficiary.

Family Plans

Family RESP accounts can only be opened by blood relatives and adoptive parents. Obviously it only makes sense to open a family RESP if you have multiple children, otherwise the management of the individual RESP is probably much easier.

With family plans contributions and grant amounts have to be tracked more rigorously. That’s because when contribution are made, there has to be declaration for what beneficiary should be receiving the money. This has an impact on the grant amounts that can be received by the child. All those crazy rules related to government grants, that I wrote about in my previous post, need to be taken into consideration.

The nice thing about having everything in one account is that it makes it really easy to transfer funds over to another beneficiary. Although individual accounts can be merged as well, there is certainly a lot less paperwork to go through. I wouldn’t necessarily say this is a big issue if you have to decide between the two types of accounts.

A single family account may also save you in administrative costs that the financial institution you use may charge. A single account will only incur one set of fees rather than 2 or 3 or however many children you may have. You should really shop around and see what financial institution offers the most competitive fees that suit your needs.

What’s Better?

At the end of the day, family and individual plans all have the same features and benefits when it comes to grants and tax free status. How you want to setup the accounts is totally up to you and how you want to manage your funds.

I would check on the fees to see if having one account is much more economical than having two. That might be a deciding factor if the financial institution you are using is taking a big chunk of your contribution each year. The only other factor is whether you feel the extra fees is worth it in order to have less overhead of managing and keeping track of contribution and grant limits in a family account.

If you have one child, it’s a no brainer to use an individual account. If you are opening an account for someone that is not your immediate child, then the individual account is the only way to go.

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