Things to consider when designating beneficiaries for an investment account
Registered Retirement Savings Plans (RRSPs) and other registered retirement accounts, such as Registered Retirement Income Funds (RRIFs) and Defined Contribution Pension Plans (DCPPs), may have beneficiaries named to receive the proceeds of the account upon the death of the account holder.
The most common beneficiary is a spouse or common-law partner. The beneficiary can keep the tax-deferred funds tax-sheltered by transferring them to their own registered account. Even if the spouse is not designated as the beneficiary of the account, there may be other methods for the account proceeds to be transferred tax-free to the surviving spouse.
Some wills deal specifically with RRSP accounts. If a will indicates that a spouse is entitled to amounts from an RRSP, the spouse and the executor (who is often also the spouse) can choose to transfer the deceased person’s account on a tax-deferred basis. Alternatively, if the RRSP is not mentioned in the will, but the surviving spouse is the beneficiary, as is often the case, it is possible to make the same choice of tax deferral.
If children or other beneficiaries other than the spouse are named in an RRSP contract, tax is generally payable by the deceased’s estate on the market value of the account at the time of death. There may be exceptions for dependent children or grandchildren, allowing tax deferral by using a fixed-term pension up to the age of 18, or for disabled children or grandchildren, at through a transfer to their RRSP or Registered Disability Savings Plan (RDSP).
There are advantages to designating people as beneficiaries of an RRSP account. In particular, the account will be distributed relatively quickly after death and without incurring probate fees or estate administration tax.
There are drawbacks, however. Designating an individual does not allow for contingencies that can be resolved in a will by designating your estate as beneficiary, such as 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. It may seem unlikely, or you may think that you can just update your beneficiaries if it happens, but what if you become disabled as you get older and are no longer able to upgrade? update your beneficiary designations? A person acting as an agent cannot change wills such as beneficiary designations or your will.
A Tax Free Savings Account (TFSA) can have a beneficiary or a successor holder. Only a spouse can be the successor holder. The advantage of appointing a spouse as successor holder is that they can take over a TFSA account on the death of their spouse without affecting their own TFSA rights or without any potential tax payable.
If a spouse is named as beneficiary, a TFSA can be transferred to the survivor’s TFSA without affecting their TFSA rights by December 31 of the year following death. However, exempt contributions only amount to the fair market value of the TFSA account at the time of death, and any subsequent income and growth is taxable until the date of transfer.