Estate Planning with your RSP

February 9, 2016

All registered investment accounts (RSP’s, LIRA’s, RIF’s, LIF’s and TFSA’s) have important estate planning opportunities that are often missed.  This article covers what you need to know.

My mother passed away at age 91.  She was a very practical individual and asked me before she died the best way to pass along her estate to my two sisters and me.  She did not want one penny to be spent on taxes or probate that did not need to be.  Following my recommendations, she sold her house and put all the money in a joint account with my younger sister.  She rented an apartment and lived comfortably on her government pensions and a small withdrawal from the joint investment account.  When she passed away the $10,000 in her joint bank account and the money in the joint investment account passed to my younger sister as she was “joint account holder with right of survivorship”.  My sister divided up those assets and gifted them to my older sister and I as my mother had wished.  No probate process was required or fee paid.  The taxable income on the joint investment account had to be realized to date of death and a small amount of tax was paid with her final tax return.  It was the simplest estate process I’ve ever been involved in.   Note this strategy worked because all the siblings got along and trusted my younger sister – it would have been a mess if we didn’t.  Also, recent court cases suggest my mother should have put her wish in writing regarding the joint account otherwise these assets may have been considered probatable.  However, this does illustrate how estate planning can make life easier and less costly to your heirs.  Most of us need to consider many more things regarding passing along our estates but can still benefit from doing a bit of estate planning – and a large part of our estate is typically held in our registered investments.

Anyone with a registered account (RSP, LIRA, RIF, LIF, TFSA) and is married and has children or another individual named in their will, needs to consider naming them as primary and/or secondary beneficiaries vs including “estate” as a beneficiary.  When your estate is named as a beneficiary, those assets are subject to probate fees, now called estate administration tax.   I say “consider” because this may not be ideal in all situations – especially if any of the beneficiaries or trustees do not get along or where potential conflicts exist as can occur in blended families.  If any of the latter situation exists consult a competent estates lawyer – you will be saving your heirs a great deal of pain and frustration.

All registered investment accounts (and pensions!) have the option of naming a primary beneficiary and secondary beneficiary who would receive the funds directly after death of the owner.  The primary advantage of naming an individual is that the funds are not held up, tax and/or probate fees can be avoided.

Probate is a court process that primarily ensures the validity of a Will and confirms the authority of the estate trustee or executor to administer estate’s assets distribute as indicated by the Will.  If a Will requires probate, the value of all assets in the estate must be documented, the probate fees calculated and submitted with documents filed (typically by a lawyer) with the estate’s court.  The assets are held and typically cannot be withdrawn until the probate certificate has been issued by the court.   A Will must be probated if the deceased individual was the sole owners of the assets or was an owner of a portion of an assets as a tenant in common (such as can be with real estate) or if required by anyone or an institution holding assets registered for that individual.

Registered assets can be quite significant, especially when one is close to retirement.    Registered assets of $500,000 to $750,000 if left to an estate would be subject to probate fees of $7000 – $11,000. And they will be held in limbo until the probate certificate has been issued by the court. Leaving assets directly to an individual avoids probate and simplifies the process – but care must be taken as not all situations are right for this strategy!

A surviving spouse should (In most cases) be named as the primary beneficiary of all registered accounts.  This allows the surviving spouse to roll the registered account assets (including TFSA’s) into her/his registered assets tax and probate free.   However, the secondary beneficiary is often by default the estate and it is here where children or other individuals can be named to ensure assets flow directly to them.

When naming anyone other than the spouse as primary or secondary beneficiary, all of the assets in the account go directly to those beneficiaries.  Note that no tax is deducted, nor is probate charged.  This can create a problem if there are insufficient assets in the remaining estate to pay the tax that will be assessed on the registered assets.  At death the market value of all registered assets are taken into income and considered taxable in the year of death.  For someone who died having earned taxable income of $75,000 to date of death with $500,000 market value of RSP’s, this means their final tax return would show taxable income of $575,000 – Currently that would result in $247,581 owing in income taxes.  If there are insufficient fund available in the estate, CRA will go after the trustee and beneficiaries to pay the tax!

Another strategy for young couples with children under 18 that is possible is to name their children as primary or secondary beneficiaries of their registered assets.  If both spouses pass away, the children receive these funds in trust tax free for their care.  Couples who want to avoid probate and tax on the funds or want the surviving spouse to have some funds to help care for the children could name their children as partial beneficiaries on registered accounts and flow tax free funds to trust accounts in the children’s name.  There can be complications with this strategy if the Office of the Children’s lawyer is involved who may limit access to the funds and require the funds to be held in trust until age 18 when the funds must be paid to the children.  Working with a competent estates lawyer and financial planner will help minimize the complications and risks.

Registered investment accounts can be an effective tool to minimize estate administration costs – they can also cause pain, frustration and delays if not used properly.  Consulting an estate lawyer and/or competent financial planner is recommended in all but the simplest of family situations.

Richard WR Yasinski CFP

(Thanks to Donna Neff, my estate lawyer, for her help)