Give them the gift of education
The grandkids may not go bonkers over it, but contributing to a RESP this holiday could be the perfect present
N RESP contribution is a gift that keeps on giving.
(That’s one heck of a Christmas present!)
Of course, this gift’s lucrative nature may not necessarily win the hearts of grandkids in the near-term.
But contributing money to their post-secondary education fund is arguably money better spent than on, for example, a glittery slime-pooping unicorn (and yes, that’s a really hot gift this season, which after taxes costs just about $100).
What’s more is — let’s face it — cash-strapped parents can always use a little financial help from the grandparents. And a recent survey by an RESP investment fund company says some families may need a boost more than others when it comes to saving for their kids’ education.
Most surveyed parents did state they save in an RESP (registered education savings plan) or even a TFSA (tax-freesavings account), according to the Ipsos study released last month on behalf of Knowledge First Financial.
Yet about 20 per cent indicated they have no additional money for that goal in their household budget. And for lowincome families — often single parents — that number increases to 62 per cent.
Heck, even for those who are saving, many probably aren’t saving enough.
“What we found is people really do underestimate the cost,” says Suzanne Martyn-Jones with Knowledge First Financial.
“The majority of parents thought the first year would be less than $10,000, and then when we showed them the cost... 75 per cent said they were going to save more.”
That number parents saw was roughly $12,500 per year. Of course, the figure is jacked up a bit. It includes expenses for housing and other basic living expenses.
And most parents are satisfied to help cover their children’s tuition and some books. So the true cost for many may be less if the kids live at home while completing a post-secondary program.
“Regardless, the reaction we heard regarding this issue was ‘I better save more,’” she says.
While most families surveyed indicated they’d try to save more, only 43 per cent stated they might ask
Afamily for help.
“In one sense that means some are open to asking for help, but it’s also the lowest among the measures they were willing to take,” Martyn-Jones says.
“And that begs the question: are people comfortable asking family to pitch in for their kids’ education?”
Which leads us back to the original premise here: if you’re a grandparent, why wait for them to ask for assistance? Help out now with a holiday contribution. That is, if you have the money to help.
Some data on wealth in Canada suggest many silver-haired folk might. About $1 trillion in wealth is expected to transfer from one generation to the next in Canada by 2026, according to one study from 2016. One might assume a good number of people with this wealth have grandkids.
What’s more is this is taxable money that may ultimately end up the hands of the kids and then, hopefully, the grandkids anyway.
Not surprisingly then, transferring some wealth ahead of time — avoiding probate fees upon death — to contribute to the grandkids’ education is actually a fairly common strategy, says Cory Papineau, wealth adviser with the Winnipeg Police Credit Union.
“I love that they want to help their grandchildren, and understand the importance education has today and in the future.”
But he also cites a caveat. Rather than opening a plan for the grandchildren on their own, “I encourage them (grandparents) to consider having the parents open and administer the plan, and they can then make contributions to that account.”
The reason being is if grandparents set up the account, they become the subscribers — managers of the RESP — and that’s an 18-year-plus commitment.
“They are ultimately the owners of the funds, must make the investment decisions and be in charge of the withdrawals and administration when the grandkids are ready to attend school,” Papineau says. “With many parents having children later in life, that could mean that (grandparents) could be managing the RESP well into their 80s and beyond.”
Well, hey, why not?
A good number of seniors are still active in their 80s. Still, there are some risks to that strategy. For example, one in six individuals is likely to suffer from dementia by age 80, which begs the question: who might manage the plan if that misfortune occurs?
Risks aside, certified financial planner MaryAnn Kokan-Nyhof with Desjardins Financial Security in Winnipeg says she has a number of clients who do set up RESPs for their grandkids.
“All of whom started when their grandbabies were first being born.”
Their thinking, she adds, is young families don’t have free cash flow to fund an education plan.
For that matter, Kokan-Nyhof even recommends grandparents take on that role as subscribers to ensure the money otherwise doesn’t flow into general finances of the family, and not education.
She argues there’s another reason, too.
“With the rise of divorces, the funds in the RESP can become a push-mepull-you tug of war between parents.” That can’t happen with grandparents as the subscribers.
Doing so, however, is not a small commitment. It requires a fair bit of planning. Besides coming up with the money to fund the account, grandparents need their grandkids’ social insurance numbers and other basic personal information.
They also need to plan how the account will pass to the beneficiaries should they, well, pass.
This is where things get tricky, Papineau says.
“This subject could be an entire article in and of itself as the complexities for successor subscribers and who owns the funds can create a whole additional suite of issues,” he says.
Unlike RRSPs and TFSAs, the RESP is not a trust. “The funds technically belong to the estate and unless someone is named in the grandparents’ will as the successor, the executor would be required to wind up the plan and distribute the funds to the beneficiaries of the estate.”
And those beneficiaries are not necessarily the grandkids who are listed as beneficiaries of the RESP. While potentially complicated, grandparents can create the account and manage it for the long term. What’s likely needed to ensure it’s done properly to avoid estate problems is good advice from a financial professional.
That said, the simplest way forward is often to work with the parents. Get them to set up the account and give them the cash to contribute.
Regardless of how this sausage gets made, contributing to the RESP for the grandkids — as long as you have the moneyed means to do it — is a choice gift this time of year.
The grandkids may not squeal with glee, but they may have to take that much less debt once enrolled in postsecondary.
And that’s something we can all cheer about.
Children may not appreciate a generous contribution to their education yet, but they will say thank you when they are in less debt later in life.