Estate planning for your RRSP/RRIF
The Implications of Naming Beneficiaries
By Susan Gottlieb
Estate planning is important so that you can retain more of your assets, protect your estate and leave a lasting legacy for your family. You may have an RRSP/RRIF that’s a significant part of your wealth; with that in mind, it should be properly accounted for in your estate plan. This article discusses some of the advantages and disadvantages of naming one or more beneficiaries of your registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) and the tax implications for these plans at death.
Taxation of your RRSP/RRIF at death
As a general rule, when you pass away, the fair market value (FMV) of your RRSP/RRIF is included as income on your final tax return and taxed at your marginal rate. Any income earned in your RRSP/RRIF after the date of death and until December 31 of the year after the year of death (the exempt period) will be taxed in the hands of the beneficiary named on your plan or your estate (if no beneficiary is named on the plan) as income in the year it’s paid. The taxation of any income earned in your RRSP/RRIF after the exempt period is as follows:
If you have a depositary RRSP/ RRIF, the income earned after the exempt period will be taxed to the beneficiary or the estate (if there’s no named beneficiary) in the year it’s credited or added to the deposit.
If you have a trusteed RRSP/RRIF, some of the income earned after the exempt period will be taxable to the RRSP/RRIF trust annually. The remaining income will be taxable to the beneficiary or the estate (if there’s no named beneficiary) in the year it’s paid out, to the extent that the funds have not been included in the RRSP/RRIF trust’s income in a previous year.
Finally, if you have an insured RRSP/RRIF, the income earned after the exempt period is taxable to the beneficiary or the estate (if there’s no named beneficiary) in the year that it’s paid out.
There are exceptions to these rules when you designate certain persons as the beneficiary of your plan. In these circumstances, the tax on your RRSP/RRIF proceeds may be deferred and/or taxed in your beneficiary’s hands. These exceptions are discussed in the following sections.
How to designate a beneficiary
In all common law provinces and territories, you may designate a beneficiary of your RRSP/RRIF by naming them on the plan documentation or in your Will. If you live in Quebec, you cannot name a beneficiary on your plan documentation, you must do so in your Will. If you name a beneficiary on the plan documentation, this may simplify the tax reporting and minimize probate taxes. You may also be able to minimize probate taxes by naming a beneficiary in the non-dispositive section of your Will. The non-dispositive section is outside the body of the Will. Please consult your qualified legal advisor if you’re considering making a beneficiary designation in your Will.
If you name a beneficiary on your plan documentation, it’s important to ensure the designation is consistent with any designation you may have made in your Will. In general, if there’s a conflict between the designation on your plan and the designation in your Will, the later designation revokes the earlier one.
It’s important to note that if the financial institution holding your plan is unaware of a later designation you may have made in your Will, when you pass away, the institution will pay the assets directly to the beneficiary named on the plan. This could lead to conflicts between your heirs who may seek legal remedies and incur unnecessary expenses.
Designating your spouse
You may choose to name your spouse as a beneficiary of your RRSP/RRIF. For your RRIF, you’re also given the option of naming your spouse as the successor annuitant. A spouse can be a legally married spouse or a common-law partner.
Your spouse as beneficiary
When you designate your spouse as the sole beneficiary on the plan documentation, your RRSP/RRIF will be wound up on your death and your spouse may transfer the plan assets directly to their RRSP or RRIF as a tax-deferred rollover. If your spouse transfers the plan assets to their RRSP, they must be 71 years of age or under at the end of the year the transfer is made. Alternatively, your spouse may transfer the funds from your RRSP/RRIF directly to an issuer to purchase an eligible annuity. In each of these cases, the tax on the amount transferred is deferred until your spouse withdraws the money from their RRSP/RRIF, receives a payment from the annuity or passes away. Your spouse must make these direct transfers by December 31 of the year following the year of your death. If these conditions are met, you will not receive any tax slips for the FMV of your RRSP/RRIF at the date of death. Your spouse will receive a tax slip for the amounts transferred, which they will need to include in their income for the tax year in which the transfer was made. They are generally able to claim an offsetting deduction, so no tax is payable on these funds.
It’s important to note that if your spouse does not transfer the funds from your RRSP/RRIF to their own RRSP/RRIF or use the funds to purchase an eligible annuity by December 31 of the year following the year of death, or is not named as sole beneficiary of your RRSP/RRIF on the plan documentation, they may still be able to defer the tax on some or all of the RRSP/RRIF proceeds to which they are entitled. However, they will not be able to directly roll over these funds to their own RRSP/RRIF or to an issuer to purchase an eligible annuity, and the tax reporting for both you and your spouse will be much more complex.
Conclusion: When creating your estate plan, it’s important to consider the appropriate beneficiary to inherit your RRSP/RRIF. Even if you have named a beneficiary on your RRSP/RRIF, consider reviewing all of your beneficiary designations regularly to ensure they’re up to date and that they reflect any changes to your personal family situation.
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