Divorce Lawyer: What Happens With an RESP When You Divorce?
Mar 21, 2023
A good divorce lawyer understands that there are few very clear decisions when divorcing. There are many guidelines, regulations, and laws governing separation and divorce, but every family’s situation is unique, and that means that grey areas can arise in almost any case.
One of these grey areas has historically been the treatment of Registered Education Savings Plans (RESPs) when parties separate.
Spring is the time of year when many students are getting college and university acceptance and starting to plan for their futures. Because of the high cost of post-secondary education, many families contribute to an RESP to help pay for the education.
What is an RESP?
An RESP is special savings account for parents who want to save for their child’s education after high school. Investments in an RESP grow tax-free, and a portion of the funds may even be matched by the Canadian government, making them a traditionally sound investment.
An RESP involves three parties:
- The subscriber who opens the account. Married or common-law couples can be joint subscribers.
- The promoter – the financial institution that holds the funds, and pays out when money is needed.
- The beneficiary – the child who will receive the funds.
RESPs are designed to be used for specified education costs; should the child not continue education after high school, the funds can be transferred to another beneficiary, added to your RRSPs, or cashed out by the subscriber(s) who contributed.
So, what happens when parents divorce? Is the value of the RESP considered property to be split? Are individual parents/contributors entitled to manage the portion they contributed?
These questions and more were raised in a recent case heard in the Ontario Superior Court, Labatte v. Labatte 2022 ONSC 4787.
Divorce Lawyer: RESPs and Divorce
When parents divorce, under the Income Tax Act, RESPs are not required to be divided. Both parents can choose to continue to be joint subscribers OR they can decide to split the funds into RESPs with the same beneficiary without penalty.
In most cases, Separation Agreements include a clause designating the funds to be used toward a beneficiary’s education and living expenses. A good divorce lawyer can advise you on how to document how additional educational costs will be shared by both parties.
Labatte v. Labatte 2022 ONSC 4787
In this case, both parents had agreed to continue contributing to an established RESP after separation. The mother earned substantially more than the father, however, their contributions were roughly equal.
Their eldest child was estranged from the father. When the child was accepted to university, they approached their father, who refused to release funds from the RESP.
The father asked for a court order to divide the RESP into two accounts – one for each of the parents. The new RESPs would be proportionate to their contributions, and the two separate subscribers would then use their shares to cover expenses – again, proportionate to their contributions.
The mother disagreed, arguing that she had paid the majority of child-care expenses, and wanted to use the RESP to cover post-secondary expenses. She argued that the RESP was being held in trust for the children.
Although there was a wide difference between the two approaches, both arguments were founded on past case law.
Justice Faieta, the judge in this case, reviewed the framework of RESPs concluding:
- As a general rule, an RESP belongs to the subscriber who initiated the fund, not the beneficiary.
- However, an RESP can be considered to be held in trust for the beneficiary if three elements are in place: “certainty of intention to create a trust, the certainty of subject matter, the certainty of objects.”
The Separation Agreement clearly stated that the “RESPs maintained by the parties shall be used for the children’s postsecondary education.” The word “shall” implies a legal obligation, the RESP was defined as the subject, and children were clearly defined as the object.
As a result, Justice Faieta determined that the fund in question was indeed being held in trust. The mother was given sole authority to disburse the funds, providing an account to the father for any withdrawal of money from the RESP.
Be Clear with Your Intent and Wording
This case highlights the importance of working with your divorce lawyer to include clear wording in your Separation Agreement about how an RESP should be used, and how responsibility will be shared.
Parents who are divorcing should be clear about whether the RESP will:
- Be divided between the two parties to be used as each sees fit – whether for education or not.
- Be used for the child’s post-secondary expenses, and how parents will share additional expenses.
If one parent is the sole subscriber, the other party may wish to include language in the Separation Agreement to ensure the fund is used to cover educational expenses by adding both parties’ names to the account or splitting it during the settlement.
It is equally important to talk to your divorce lawyer about including language on how disputes will be resolved.
For Experience, You Can Trust: Contact the Best Divorce Lawyer. Kelly D. Jordan Family Law Firm
Divorce is no simple matter – emotionally or legally. You need a divorce lawyer you can trust. One with a deep understanding of the law, and the compassion to understand your needs. You can count on the family law team at the Kelly D. Jordan Family Law Firm. Contact us to consult with a member of our family law team today.
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BNN Bloomberg: Your divorce and RESPs: What happens to your children’s education savings?