On an RRIF and TFSA, it is possible to designate a beneficiary directly on the registered plan. An essential advantage of naming a beneficiary on registered plans is that this saves probate tax on the value of the plan at death, as the value of the plan will be paid directly to the named beneficiary and will not form part of the deceased’s estate.
Benefits Beyond Saving Probate Fees
Where the deceased plan holder has a spouse or common-law partner (hereinafter a “spouse”), rather than naming the spouse as a beneficiary, the plan holder has the opportunity to name the spouse as successor holder on his or her TFSA and successor annuitant on his or her RRIF. Similarly to naming a beneficiary, this approach keeps the registered plan out of the deceased’s estate, thereby saving probate tax on the value of the plan. However, there are some added advantages to naming a spouse as successor holder/annuitant rather than naming him or her as beneficiary.
Only a spouse can be named as a successor holder/annuitant. Naming a spouse as a successor holder of a TFSA means that upon the death of the plan holder, the surviving spouse will continue to enjoy the tax-free status of the account until the end of the calendar year following the year of the plan holder’s death. Up until this time, the successor holder can also contribute the funds from the plan holder’s TFSA to his or her own TFSA as an exempt contribution (i.e. it will not be subject to the successor holder’s contribution limits for that year). This also allows the successor holder to retain the investments of the TFSA. Comparably, if the TFSA did not have a successor holder, it would cease to be a TFSA on the death of the plan holder and any income earned after the date of death of the account holder would be taxable to the beneficiary of the TFSA. Moreover, according to some financial institutions, a beneficiary cannot retain the investments held by the TFSA but can only receive a cash lump sum.
For an RRIF, where a spouse is named as successor annuitant, upon the death of the deceased plan holder (the “deceased annuitant”), the RRIF would continue on in the name of the surviving spouse. This gives the surviving spouse the choice of if and when to collapse the deceased annuitant’s RRIF. Comparably, if the spouse was named as a beneficiary rather than successor holder, the RRIF would be wound up upon the death of the deceased annuitant and the funds in it would be paid to the surviving spouse as a lump sum (which the surviving spouse could choose to transfer to his or her RRIF). Further, if a successor annuitant or beneficiary contributes the funds in the deceased annuitant’s RRIF to his or her own RRSP, there is a tax rollover available in both situations. However, where the spouse is named as beneficiary, the surviving spouse and executor (if they are not the same person) must undertake additional steps on the deceased’s and surviving spouse’s tax returns to achieve this rollover, whereby naming a successor holder allows for an automatic rollover.
Maximize Income for Beneficiaries Through Careful Estate Planning
Essentially, naming a spouse as a successor holder/annuitant rather than beneficiary allows the surviving spouse to step into the shoes of the deceased plan holder with respect to his or her registered plans and facilitates ease of administration of such plans upon death. The simplest way to ensure your spouse is designated as your successor holder/annuitant is to designate him or her as such directly on your contract with the institution you hold your registered plan(s) with. If you did not do this before your death, there would still be an opportunity for your executor to make this designation following death. For an RRIF your executor must consent to this designation and the institution the RRIF is held with must agree. For a TFSA, the surviving spouse can become the successor holder even if not named as such in the contract if he or she is named as the beneficiary of the TFSA in the Will of the plan holder or is the sole beneficiary of the plan holder’s Estate under his or her Will.
At Mills & Mills LLP our estate lawyers can assist you in developing an estate plan that considers the above factors, among others, to best suit your needs. To learn more about how we may be able to assist you please reach out to us online or by phone at (416) 863-0125.