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When opening certain investment accounts, investors may have the option to designate a beneficiary. It is important to consider the implications in order to minimize tax payable and ensure estate wishes are fulfilled upon the death of an account holder.
RRSP
Registered Retirement Savings Plans (RRSPs) and other registered retirement accounts, like Registered Retirement Income Funds (RRIFs) and Defined Contribution Pension Plans (DCPPs), can have beneficiaries named to receive the account proceeds upon an account holder’s death.
The most common beneficiary is a spouse or common-law partner. The beneficiary can have the tax-deferred funds remain tax sheltered by transferring them to their own registered account. Even if the spouse is not named as the account beneficiary, there may be other methods to have the account proceeds transferred on a tax-sheltered basis to the surviving spouse.
Some wills specifically address RRSP accounts. If a will states that a spouse is entitled to amounts from an RRSP, the spouse and the executor (who is often the spouse as well) can elect to transfer the account of the deceased on a tax-deferred basis. Alternatively, if the RRSP is not addressed in the will, but the surviving spouse is a beneficiary, as is often the case, it is possible to make the same tax-deferral election.
If children or other non-spouse beneficiaries are named in an RRSP contract, tax is generally payable by the estate of the deceased on the market value of the account at the time of death. There may be exceptions for dependent children or grandchildren, allowing tax-deferral using a term-certain annuity to age 18, or for disabled children or grandchildren, by way of a transfer to their RRSP or Registered Disability Savings Plan (RDSP).
There are benefits to naming individuals as beneficiaries for an RRSP account. In particular, the account will be distributed relatively quickly following death, and without incurring probate fees or estate administration tax.
There are drawbacks, however. Naming an individual does not allow for contingencies that can be addressed in a will by naming your estate as beneficiary, like having a child’s share of your RRSP go to their children (your grandchildren) if the child dies before you or at the same time as you. This may seem unlikely, or you may think you can simply update your beneficiaries if this happens—but what if you become incapacitated as you age and you are no longer able to update your beneficiary designations? Someone acting as power of attorney cannot change testamentary wishes like beneficiary designations or your will.
TFSA
A tax-free savings account (TFSA) can have a beneficiary or a successor holder. Only a spouse can be a successor holder. The benefit of naming a spouse as a successor holder is that they can take over a TFSA account upon the death of their spouse without impacting their own TFSA room or without any potential tax payable.
