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Estate Planning: The Importance of Beneficiary Designations

February 11, 2020

When you open a Registered Retirement Savings Plan (“RRSP”), Registered Retirement Income Fund (“RRIF”), or Tax-free Savings Account (“TFSA”), the account opening documents typically include a place for a beneficiary designation. What is a beneficiary designation, and what are the consequences of designating or not designating a beneficiary?

Beneficiary Designation Explained

A beneficiary designation is simply a way of specifying who will receive the assets in your RRSP, RRIF, or TFSA after you have died. If you make a designation, then those assets pass to the person(s) named in the beneficiary designation. If you do not make a designation, then those assets become part of your estate, and will be dealt with by the executor of your estate, in accordance with the terms of your will.

Registered Retirement Savings Plans and Registered Retirement Income Funds

When you die, the fair market value of your RRSP or your RRIF is included in income on your final return. If someone other than your spouse is the named beneficiary, then all of the assets will pass to that person, however your estate will be liable for income tax on the amount included in income on your final return.

If your spouse is the named beneficiary of your RRSP or RRIF, the plan and its assets can be transferred into their RRSP or RRIF on a tax-deferred basis. If your spouse is not the named beneficiary, it may still be possible for the assets to transfer on a tax deferred basis, but this depends on the terms of your will and requires that your spouse and the executor of your will file a joint election with the CRA.

Tax-free Savings Accounts

In the case of a TFSA that is a trust arrangement[1], the trust continues after your death, and remains a non-taxable trust for at least 1, and up to 2 years after your death, depending on the date of death. Beneficiaries of your TFSA may receive payments from the TFSA up to the fair market value of the account at the date of death without tax, but will be subject to tax on any payments in excess of this amount.

If your spouse is the named beneficiary of your TFSA, it may be possible to transfer the assets in your TFSA to your spouse’s TFSA without affecting your spouse’s contribution limit. This requires that your spouse files a prescribed form with the CRA and that the transfer occurs before the end of the calendar year following the year of death.

Probate Fee Savings

If a beneficiary is not designated, then the assets of the RRSP, RRIF, or TFSA become part of your estate, and probate fees will apply to the value of those assets[2].  Simply designating a beneficiary of your RRSP, RRIF, or TFSA can result in probate fee savings.

Contact your DMCL advisor today and learn more about estate planning.

[1] As opposed to a deposit or annuity contract.

[2] BC Probate Fees on assets in excess of $50,000 are 1.4%.