It’s that time of the year when you should have received your annual pension statement by now. Do you know who your beneficiary is? Beneficiaries is our next topic of discussion in our weekly estate planning series. Beneficiaries are an important part of estate planning, yet sadly they’re often overlooked.
You may have meant to appoint your spouse as the beneficiary of your RRSPs, but unless you actually got around to doing it, it could mean a lot of extra work for your loved ones if you suddenly pass away. Your loved ones will already be dealing with your passing – do you really want to add the burden of them jumping through hoops for your pension and RRSP? Let’s look at beneficiaries in the context of TFSAs, RRSPs and pensions.
Despite being introduced with little fanfare in 2009, TFSAs have proven popular with Canadians. Since inception, as of 2016 you’d have $46,500 in total contribution room – not bad! That will grow over the coming years. To ensure the money you’ve worked so hard to save is protected from the taxman when you pass away, you can name your spouse or common-law partner as the “successor holder.” As the successor holder, your spouse will automatically become the new holder of your TFSA without paying any taxes (this won’t affect their TFSA contribution room either).
A successor holder is not the same thing as a named beneficiary. With a named beneficiary such as your child or sister, your TFSA will cease to exist and the funds will be distributed to them. There can be tax implications with beneficiaries. For example, if John passed away and named his spouse Sally as the successor holder, Sally wouldn’t have to pay any income tax. However, if John only named Sally his beneficiary and he passed away, Sally would have to pay her fair share of tax on any gains in the TFSA between his passing and when she receives the funds.
RRSPs are slightly different than TFSAs. Unlike TFSAs you can’t name a “successor holder,” although you can name a beneficiary. When you pass away, the value of your RRSP is normally included in the tax return in your year of death. Depending on the amount in your RRSP, this can mean a big tax hit for your estate. This could push you into the highest marginal tax rate in your final tax return. To avoid this you can name a beneficiary, such as your spouse or common-law partner or children.
The death benefit of your pension depends on if you’re an active employee (still working) or retired. When you retire, you have the option of choosing a joint and survivor pension. This means that your spouse or common-law partner receives a percentage, say 60 percent, of your pension upon your passing.
If you die while still working, it’s a little more complicated. The death benefit depends on your work province. Your spouse is often entitled to a more generous death benefit than your beneficiaries. If you don’t have your spouse or beneficiaries listed, the death benefit will be payable to your estate. When you receive your annual statement make sure your spouse and beneficiary information is up to date to ensure your pension passes to your loved ones in the most tax efficient manner.
We’ve only touched the tip of the iceberg on beneficiaries. Next week we’ll discuss RRIFs, segregated funds and life insurance policies. Need help setting up your beneficiaries? We have a team of experts who can help you navigate the sometimes complex waters of estate planning. Feel free to contact our office today.