Over the years I have reviewed a handful of my client’s RRSPs who had their assets with one of my competitors, and several times I have been shocked with how poorly it was communicated to the customer how important the beneficiary selection is.
In the last year a long-time senior client of mine sadly died unexpected and had two RRIFs. One with me showing his spouse as beneficiary (as Successor Annuitant/Owner) and the second with an online self service provider with his “Estate” as beneficiary.
The account I managed was switched to the spouse with one signature and the RRIF payments continued to her seamlessly the next month. The second account with the online trading platform required the executor to get Letters of Probate and took up to six months to settle, along with the resulting fees which were unnecessary.
Obviously one of the risks of a “Do it Yourself’ platform is that none of this is explained to the consumer, but I also see this in accounts set up by the bank with more junior staff. Many times, the default is to select “Estate” and not explain the repercussions to the client
I have a Spouse so should I have them as Beneficiary?
If you are in a stable marriage without eminent risk to divorce the answer is Yes as spouses (including common law) can roll the proceeds over to each other tax free at death. It’s a clean simple transfer and is especially important when a RRIF is involved as the survivor can continue the RRIF payments uninterrupted.
What about if I am Single with Children?
Different rules apply based on:
A child who is dependent on the deceased parent because of a mental or
physical disability can roll the proceeds tax free into their own RRSP
If the child is under age 18 and not considered disabled then the proceeds can be rolled into an annuity and paid out to the child in the form of annual
payments. The payments must be spread out based on a CRA formula [18minus the age of the child] over the number of years calculated and is taxable to the child as received.
A non-dependent child over the age of 18 can receive the proceeds tax free
with the full tax liability reported on the deceased parent’s final tax return.
Should my Spouse be the Beneficiary or Successor Annuitant/Owner of my RRIF?
If the spouse is named beneficiary, at death the RRIF is closed and proceeds can be rolled tax free into the surviving spouse’s existing RRSP or RRIF. This can be advantageous if there is a significant age difference and the surviving spouse is under age 71 as they can continue the RRSP until the end of the year they turn 71 before converting to a RRIF.
The disadvantage is that the assets inside the deceased’s RRIF are sold and then repurchased inside the surviving spouse’s RRSP or RRIF. This is especially important if the deceased had purchased GICs during a period of high interest rates OR purchased investment funds prior to a global stock market decline.
If a Successor Annuitant is selected the surviving spouse takes over the RRIF
“seamlessly” without any disruption to the holdings inside the contract, including the payment stream.
Can a Charity be named as Beneficiary?
Yes, and this can be a creative way to reduce or eliminate any tax liabilities the estate may face as the charity will issue a tax receipt for income tax purposes.
This can be designed so that the charity is the named primary beneficiary or through the Will. Typically, if the proceeds are being to be paid to the charity by the executor of the Estate, the Estate should also be the beneficiary of the RRSP/RRIF.
What is a Contingent Beneficiary and why is it important to have one designated?
One of the unique features of Segregated Funds and GICs purchased with a Canadian life insurance company is the ability to add a Contingent Beneficiary. This means if the primary beneficiary dies before the owner of the RRSP/RRIF or if they died together, a back up beneficiary is in place.
This avoids having the proceeds flow through the Estate which means probate fees and delays until the Estate is settled.
Proper beneficiary designations are important on all investments and many “DIY” platforms and inexperienced bank staff do not fully explain this to the customer. Ensure you take care of your family’s best interests and ask questions if you are unable to determine who you appointed all those years ago!