REGISTERED INVESTMENTS AND
YOUR ESTATE PLAN
Registered investments such as RRSPs and RRIFs are important estate planning tools. They generate retirement savings in a tax-deferred environment, and they are also a way to designate a beneficiary outside of a Will. As with life insurance and joint tenancies, one can provide for direct transfer to beneficiaries without the funds passing through the estate. This avoids probate fees and could avoid claims under the Wills Variation Act. But if the beneficiary is other than your spouse, minor children, or disabled children, you need to carefully consider the matter with appropriate legal and tax advice.
- For probate purposes the property does not form part of your estate, so your estate will save 1.4% of the value of the investment when it comes time to pay the probate fees. Any executor fees are also reduced because they are usually a percentage of the estate.
- If your other property is held in joint tenancy and you have a beneficiary designated on your RRSP, you might not have to apply for probate at all. This saves legal fees and the time and trouble of administering an estate. This should be the situation for most people who are married or in a common-law relationship.
- It could avoid claims under the Will Variation Act. A court cannot change the distribution of the RRSP under the Wills Variation Act, but if there are other assets in the estate, the court could consider the size of the RRSP when it came to varying the distribution of estate assets.
- The investment, under certain circumstances, will not be available to pay the debts of the deceased or the deceased's estate. Certain products purchased through life insurance companies can provide creditor protection during your life.
- One of the downsides of the RRSP and RRIF is that upon the holder's death, the funds are taxed in the holder's name as at the date of death. Consequently there will be a large tax bill that the estate must pay.
If the beneficiary is a spouse, minor child, or disabled dependent adult child, you could receive the benefit of a rollover. The capital invested in the plan would pass without negative tax consequences. However, naming somebody other than these could have negative tax consequences. This includes non-dependent adult children.
The definition of "spouse" includes common-law spouses under the federal income tax legislation. Under this legislation a person generally becomes a common-law spouse after one year of cohabitation, and includes same sex couples. To make this more complicated, common-law couples under provincial legislation must live together for two years.
An RRSP can be transferred on a tax-sheltered basis into a trust for a dependent adult child with a disability. The income threshold for the dependent adult also allows dependent adults in receipt of provincial disability benefits to still qualify. The advantage here is that you can consider giving your registered funds to an adult dependent child and non-registered funds to other children or other beneficiaries. Restrictions still apply and professional income tax and trust law advice should be sought.
If a spouse, minor child, or dependent disabled adult child is not the beneficiary under the RRSP, there is no rollover and the estate pays taxes on the fund. This could mean that the RRSP beneficiary could receive the benefit of the RRSP funds without payment of the tax, while the other beneficiaries of the estate under the Will pay the tax. The person designated as the beneficiary of the RRSP fund might only pay the tax if there were insufficient funds in the estate to pay it. If you single out one of your children to receive an RRSP, thinking they will receive the funds net of tax you could be wrong, because your other children who are beneficiaries under your Will could end up paying the tax bill. This will no doubt lead to ill will among your children.
Once again, if you plan on leaving your RRSP to someone other than your spouse, you must obtain tax advice. The most common error is that the RRSP beneficiary designation is seen as a quick and easy way to amend an estate plan. The individual or the financial institution making the change order does not consider the negative consequences.
- The beneficiary designation is not a Will substitute. You still need to consider who takes your RRSP if your beneficiary predeceases you, you die in a common accident, or the surviving spouse dies. In a second marriage situation with two sets of children, in the absence of a Will if you die on day one and your spouse dies on day two, then your spouse's children will receive your RRSP.
Also remember to update your beneficiary if your situation changes. For example, your ex-spouse might still be named as the beneficiary of your RRSP. If you have remarried, this will not endear you to your current spouse.
- Another factor to consider is that if a beneficiary designation needs to be changed, a person acting under a power of attorney cannot normally make that change. This can cause difficulties if an RRSP is transferred between institutions. Legal advice should be obtained if you wish to transfer funds and maintain the beneficiary designation.
So, before you make any RRSP beneficiary designation changes talk to your tax advisor and your legal advisor. You could unintentionally create major problems for your beneficiaries if you are not careful.
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