Caution is the Rule in Naming RRSP Beneficiaries
July 5th, 2016
Selecting beneficiaries of your registered retirement plans is one of the most important financial decisions you will make, and with a little thought you can maximize the benefits to your heirs by deferring taxes and keeping the assets out of probate and away from creditors.
The most important action is to actually name someone to receive the assets from your Registered Retirement Savings Plans (RRSPs) and your Registered Retirement Income Funds (RRIF). Otherwise, the plans automatically go into your estate, which pays taxes that can devour as much as half the value of the assets.
Your estate will also have to pay probate fees and the assets become subject to creditors’ claims. (See below for other potential complications to avoid.)
When considering your registered plans it is critical to note that if non-dependent children or others are left plan assets in your Will, the full value will be taxed as income in your final return and only then will they receive their share of the estate.
You can defer taxes if your beneficiary is:
- Your spouse or common-law partner, or
- A financially dependent child or grandchild who is either under the age of 18 or is mentally or physically infirm.
When you name your spouse or an infirm dependent, the assets are simply rolled over into the person’s registered plan, including a Registered Disability Savings Plan (RDSP). With an infirm beneficiary, the assets can also be used to purchase an annuity.
Spousal rollovers don’t use contribution room, but RDSP rollovers reduce the lifetime contribution limit of $200,000 and don’t generate a federal contribution.
Healthy financially dependent minors have the sole option of purchasing an annuity that must mature when they turn 18. The annual payments will be taxable.
In all these cases, the beneficiaries will pay taxes on plan withdrawals or annuity payments.
Your options widen a bit when you name your spouse or common-law partner beneficiary of your RRIF. You can:
- Name your spouse the “successor annuitant,” where he or she simply starts receiving the payments.
- Arrange a lump sum payment. The fund will be collapsed, the investments sold and the proceeds rolled over into the spouse’s RRSP or RRIF. Among the disadvantages of this option is that the timing of the collapse may not be the best for selling the assets and there will be management fees.
Estate: It may make sense to name your estate the beneficiary if you want to:
- Spread the tax liability among all your heirs;
- Distribute assets to several people in different amounts;
- Impose conditions on an heir in order to receive the assets, and
- Hold the assets in trust.
Charity: You can name a registered charity and receive a tax credit of as much as 100 per cent, which can effectively eliminate taxes on your final return. You can instruct the charity how to distribute the assets through a Letter of Direction.
These are just some of the complexities involved in choosing beneficiaries for your registered retirement plans and minimizing taxes on your final return. Your accountant can guide you through the maze of estate planning.
Review and Revise
Review your Will and other estate documents often to ensure that all the paperwork is consistent or problems can arise.
For example, say you name your daughter the beneficiary of a particular RRSP. You later make out a Will leaving all your RRSPs to all your children, but you leave your daughter’s name on that one plan. A Will can generally override an RRSP or RRIF beneficiary on file at a financial institution when the Will was prepared or updated at a later date. That is an unintended consequence of failing to review and compare documents periodically.
When you have more than one plan, it’s a good idea to list in your Will the number of each, the institution holding it and the intended beneficiaries to help avoid confusion and potential contention.