For years, standard advice has been to name your spouse as beneficiary of your registered plans. If you die first, your plan can then be rolled to his or hers on a tax-sheltered basis. Otherwise, it will be fully taxed on your final return.
But some tax advisors now suggest it might be better to name your estate as beneficiary and, in your will, authorize your executors to do any allowable rollovers. That maximizes their ability to save tax.
Some exceptions to the rule
Consider this scenario where it could be to your advantage not to make the spousal beneficiary designation.
Suppose you were to die on January 1 with no taxable income for the year. You have left a $100,000 Registered Retirement Savings Plan (RRSP) and $50,000 of other financial assets in your own name. Your will contains a $50,000 charitable bequest.
If your spouse is the designated beneficiary of your RRSP, your $100,000 plan will be rolled over, tax-free, and the $50,000 bequest will come out of your personal assets. There will be no cash left to help your family adjust, and the estate won’t get any benefit from the charitable tax credit unless it can be applied to your prior year’s tax return.
Leaving your RRSP to your estate would deliver a much better result. As before, $50,000 in personal assets would go to the charity as directed in your will. Half of the RRSP assets could be transferred to your spouse’s plan. That would leave $50,000 of RRSP money still in the estate. Tax on that amount would be offset by the charitable tax credit, leaving most or all of it for your family’s use.
There are, however, some potential pitfalls to this strategy.
For one thing, probate fees will be due if the RRSP or Registered Retirement Income Fund (RRIF) is paid to your estate. That can be a major concern in some provinces but a minor one in others.
Of course, the potential tax savings from giving your executors full flexibility could easily outweigh that cost.
Second, the creditor-proofing offered by life insurance RRSPs and RRIFs does not apply if your estate is the beneficiary. You must name a close family member. British Columbia, Quebec, and Prince Edward Island make RRSPs and RRIFs creditor-proof in certain other cases, but also require a named beneficiary.
Should you determine that this strategy is appropriate, be sure that your will clearly authorizes your executors to make any allowable rollovers, considering potential tax savings and need. Otherwise, heirs who get left out could challenge the transfers.
Professional advice can help you foresee, and prepare for, all the potential implications.
Disclaimer: The information contained herein is for AB, BC, MB, NB, NS, NL, ON, PEI, QC and SK residents only and does not constitute an offer to sell or solicit sales in any other Canadian or foreign jurisdictions.