This article is the first in a three-part series exploring smart estate planning strategies that can help you reduce probate costs and ensure your assets are transferred efficiently and according to your wishes
Beneficiary designations on registered plans like RRSPs and RRIFs can allow assets to pass outside the estate, thereby substantially reducing probate tax. Understanding how these designations work, and ensuring they align with your will, is essential to avoid conflicts and achieve your estate planning goals.
What Is a Registered Plan?
A registered plan is a type of financial account registered with the CRA that offers special tax treatment. Common examples include Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs). These plans allow individuals to save and invest money on a tax-deferred basis. Upon death, the remaining value in a registered plan can pass directly to a named beneficiary or beneficiaries, bypassing the estate in certain circumstances.
Types of Investments That Allow Designations
Not all investment accounts permit beneficiary designations, but all registered plans do. In Ontario, individuals can name a beneficiary directly on plans such as RRSPs, RRIFs, and Locked-In Retirement Accounts (LIRAs). Designations can typically be made on the applicable plan administrator’s or financial institution’s form, or through a written designation that meets certain legal requirements. Understanding which plans permit designations, and how they operate, is essential to effective estate planning.
How to Make a Valid Beneficiary Designation
In Ontario, a beneficiary designation must be in writing. The most common way to make a beneficiary designation is on the plan administrator’s form. A less common but equally valid method is in a will. A valid beneficiary designation in a will must clearly identify the specific plan to which it applies. While designating a beneficiary directly with the financial institution is common, doing so in a will can often provide more flexibility, especially when coordinating with other aspects of an estate plan. Care must be taken to ensure that multiple designations dealing with the same plan do not conflict or contradict one another.
Revoking or Changing a Beneficiary Designation
Beneficiary designations are not permanent and can be changed by you, as the plan holder, at any time, assuming you have the requisite legal capacity to do so. A new designation, whether made directly through the financial institution or contained in a will, typically revokes any earlier designation for that same plan. However, confusion can arise if multiple conflicting designations exist. It is essential to keep records up to date and to review designations regularly, especially after major life events such as marriage, separation, divorce, or the death of the primary beneficiary.
Conflicts Between a Will and a Designation
Conflicts between a will and a beneficiary designation can create legal uncertainty. In Ontario, if a designation is made in both the will and the plan documentation, the most recent valid designation will generally prevail. However, disputes can arise, particularly when the wording in the will is unclear or when disappointed family members were expecting to benefit from the plan. Coordinating your designations and your will ensures they are aligned and reflect your intentions.
Tax Implications for Beneficiaries of Registered Plans
While registered plans offer tax advantages during the account holder’s lifetime, there may be tax consequences on death. In general, the value of an RRSP or RRIF at death is included in the deceased’s final tax return unless it is transferred to a qualified beneficiary, such as a spouse (including common-law) or a financially dependent child or grandchild, in a tax-deferred manner.
If the beneficiary of an RRSP, RRIF, or LIF is not a qualified rollover recipient, they receive the full proceeds while the estate pays the tax. This can create unfair outcomes if the estate’s beneficiaries differ from the plan’s.
A common-law spouse is defined in the Income Tax Act (ITA) as a person who has been living with their partner for 12 consecutive months, is the parent of their partner’s child, or has custody of their partner’s child. “Dependant” is also defined in the ITA as someone dependent on the taxpayer for support and related to the taxpayer.
Since beneficiary designations pass directly to the named beneficiary, the funds are excluded from the calculation of probate tax and are not claimable by estate creditors. Beneficiaries should be aware that receiving funds from a registered plan may have different tax results depending on their relationship to the deceased and how the plan was structured.
Final Thoughts
Beneficiary designations on registered plans play a crucial role in estate planning, affecting how assets are distributed, how quickly funds are accessed, and what taxes may apply. Regularly reviewing your designations and ensuring they align with your will helps prevent conflicts and ensures your estate plan reflects your intentions.
In the next bulletin, we will discuss why it is important to list the beneficiary designation in your will.