With the 2015 Federal Budget significantly (and immediately) increasing the amount that Canadians can contribute to their Tax-Free Savings Accounts (TFSAs), it’s a good time to review your beneficiary designations on your TFSAs, RRSPs and other registered accounts as part of your overall estate planning. Here are eight crucial things to consider about your designations:
- There’s more than one way to make a designation. You can designate beneficiaries by filling out the form that your financial institution or account trustee has prepared for that purpose. You can also make a designation in your will or in a separate document and notify the financial institution after the fact. All of these methods are equally effective under BC law.
- Assets passing to designated beneficiaries don’t go through probate. On death, your registered accounts pass to your designated beneficiaries directly, outside of your estate. The distribution of those assets is not held up waiting for a grant of probate of your will to be issued, and the assets are not subject to BC probate fees of 1.4%.
- A designation protects your assets. Assets passing to designated beneficiaries are not subject to claims of creditors of your estate. They are also safe from any risk of a wills variation claim by a disappointed spouse or child.
- You can designate more than one beneficiary. You can designate several beneficiaries, and specify the share that each one takes. If you don’t specify the proportions, the beneficiaries will take equal shares.
- You can designate alternate beneficiaries. It’s possible, and common, to designate alternate beneficiaries. For example, you can designate your spouse, but state that if your spouse does not survive you then your children or your chosen charities are the beneficiaries.
- You can designate a trustee. If you are designating children under 19 as beneficiaries, at a minimum you should name a trustee to receive and hold their share for them until they turn 19. It’s possible to set up longer term and more tailored trust terms for any beneficiary in a will or trust document drafted by a estates and trusts lawyer.
- Make your spouse a “successor holder” of your TFSA. If you designate your spouse as beneficiary of your TFSA, then on your death the TFSA is collapsed and paid out to them, making future income on those investments taxable. But if you name your spouse as “successor holder” of your TFSA, then on your death they inherit your TFSA contribution room, allowing them to effectively add your tax-free investments to theirs. Using the right wording could make an enormous difference to your spouse’s tax liability after your death.
- Consider the taxes on your RRSP. When you die, the value of your RRSP investments are taxed as ordinary income unless you leave them to your spouse. When you die with a non-spouse beneficiary named, the related taxes are paid from your estate assets and not by the beneficiary, unless your estate is insolvent. Your estate planning should plan for this liability.