Children: Trusts and RESPs
AN INTRODUCTION TO ESTATE PLANNING – PART 3.2
In my last post, I discussed the importance of naming a guardian in your will, someone who will take care of your children if you die before they are old enough to take care of themselves. Another item you should consider if your children are young is the management of the financial assets you leave to them after you are gone. Imagine you and your spouse are about 40 years old, you are worth about $500,000, and you have two children aged 11 and 9. If you have been diligent, about $80,000 of that money could be set aside for their education in a Registered Education Savings Plan (RESP). In addition, you could have life insurance policies in place that would put your estate at greater than $1 million. You are not just going to arrange to hand over that money to them directly. Managing this sort of situation is what I am writing about today.
There are many kinds of trusts, but they are all variations on one of these two types: inter vivos and testamentary. An inter vivos trust is set up during the settlor’s (the person who provides the assets that funds the trust) lifetime. Inter vivos means “among the living.” For our purposes, we are interested in testamentary trusts, that is, a trust that arises after your death, from instructions in your last will and testament.
If your children are minors, they lack the legal authority, let alone the maturity, to manage significant amounts of money. Consequently, you need to arrange for someone to hold those assets and spend them for the benefit of your children. You may want to arrange for the assets to be held in trust even beyond the age of majority (age 18 or 19, depending on the province). Giving a 19-year-old a half-million dollars without restriction might not turn out so well.
There are four parties in a trust. First is the settlor, the party that is providing the assets. Second is the trust, the entity that holds the assets. Third is the trustee, the person or entity that manages the trust. Finally, there is the beneficiary. The trustee is responsible to manage the assets in the best interests of the beneficiaries, according to the terms of the trust. Another term for best interest is fiduciary duty. However, it is the settlor who sets the terms of the trust. In the case of minor children, you may want to consider making the guardian the trustee. Another option would be to hire a trust company to take care of this responsibility, or perhaps to serve as a co-trustee in order to take care of the investment, taxation and administrative responsibilities.
How long should a trust be in operation? In your will, you can specify how old your children need to be before their portion of the inheritance is available to them completely. If 18 or 19 is too young, and it probably is, you may want to wait until they are age 25. I once spoke to a person who was rather frustrated that he and his siblings were not able to access the full value of an inheritance that had been deposited into a trust until they were 40. In the meantime, they were dealing with the expenses of paying their mortgage and raising their children.
In the event that one of your children is disabled, you may wish to set up a type of trust known as a Henson Trust. A disabled person may qualify for provincial benefits. Using Ontario as an example, that benefit is known as the Ontario Disability Support Program (ODSP). As is typical in other provinces, your ability to qualify for this program depends on your income and assets. If your adult disabled child, who is living in a group home and receiving ODSP payments, were to suddenly inherit a large sum of money directly, the child would become disqualified from receiving ODSP.
The way to resolve this issue is the Henson Trust. Instead of directly inheriting, the Henson Trust arrangement allows your beneficiary child to continue to receive ODSP benefits. This is because a Henson Trust is an “Absolute Discretionary Trust.” This means that the trustee has absolute discretion with respect to the disbursement of funds from the trust to the beneficiary. The beneficiary does not have a claim on the trust assets and therefore the assets of the trust are not considered assets of the beneficiary.
In the case of trusts in general, and Henson Trusts in particular, then, you want to make sure that your appointed trustee has a very clear idea of what you intend with respect to the trust so that the beneficiaries are properly taken care of.
Registered Education Savings Plans (RESPs)
I have written about RESPs before. In this post, I will highlight the estate issues associated with RESPs. While the assets of an RESP are typically intended to benefit your child(ren) or grandchild(ren), you as the “subscriber” to the plan are considered the owner of the RESP, while the prospective future post-secondary student is the beneficiary. In the case of RESPs, the term beneficiary does not mean that your child automatically gets the RESPs assets if you were to die, as would be the case if you named your child as the beneficiary of your TFSA.
Put more straightforwardly, the assets of the RESP are considered the assets of the subscriber, not the assets of the beneficiary. If you were to die without making specific provisions in the will for the RESP, the RESP will become part of your estate and handled like the rest of the assets in your estate according to the terms in your will.
Estate Planning and RESPs
Probably the first and best choice is to name a joint subscriber, commonly your spouse. If you are a grandparent, you may wish to name a parent of the beneficiary grandchild a joint subscriber. In that way, the RESP passes directly to the surviving joint subscriber.
If there is no joint subscriber, either because none was chosen or the joint subscriber has predeceased you, you can also name a successor survivor in your will. In that case, the RESP does not form part of your estate and avoids probate. As with selecting guardians and trustees, you need to make a good choice here as your successor subscriber is the new owner of the RESP and has the discretion to simply close the account and use the money for themselves.
A related choice is to have your will create a testamentary trust that will act as the subscriber of the RESP. Once again, this will allow for the preservation of the RESP.
NOTE: US tax law does not recognize RESPs, so it is best not to name a US citizen as either a joint or successor subscriber.
In my next blog post on Estate Planning I will discuss charitable giving.
Click here to contact me for an appointment.
In these uncertain economic times, you may be interested in a half-hour no-cost, no-obligation financial planning conversation with me. It’s called FINPLAN30 and the range of topics is wide open. Click here to sign up for a free session.
Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, accounting or legal decisions.