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If you have investments in a Tax-Free Savings Account, Registered Retirement Savings Plan or Registered Retirement Income Fund, setting a beneficiary or successor can help ensure the funds get to the people you want after you’ve passed. So what’s the difference between a beneficiary and a successor? Mindi Banach, Tax and Estate Planner, TD Wealth, joins Kim Parlee to shine some light on this important topic.
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* Today on Ask MoneyTalk, we're answering a common question we're hearing around beneficiary designations for your registered investment accounts. Mindi Banach is Tax and Estate Planner at TD Wealth. She joins me now to weigh in. So the question is, Mindi, what's the difference between a beneficiary and a successor when it comes to my TFSA, my RRSP, and my RRIF? I think we just need to back up and say the definitions of those and why we do them.
* Yes. So the first thing I want to highlight is that whether you're designating a successor or a beneficiary, the primary benefit of doing that is that it allows your registered accounts to bypass the estate, meaning you do not have to go through the probate process. You don't have to pay probate fees.
- Now, what is the difference between a successor and a beneficiary? The only person that you can name as your successor is a spouse or common law partner whereas a beneficiary can be anyone of your choosing.
- Now, more specifically with respect to the TFSA account, you have the option of naming a successor holder and/or a beneficiary. Now, if you name your spouse or common law partner as your successor holder, one of the benefits is that they can automatically transfer your TFSA account into their own TFSA account on a tax-free basis. And they don't need to have their own contribution room to make that transfer. However, if you name a beneficiary, and your beneficiary is not a spouse, while the beneficiary will inherit the TFSA account on a tax-free basis, any income associated with the funds that they inherit is going to be taxed unless that beneficiary can transfer their funds into their own TFSA account. And, again, they would need contribution room in order to make that transfer. I will say that if you plan on benefiting a spouse, there's a little bit more of a tax advantage of naming that spouse as a successor holder because the transfer happens automatically, whereas if you named a spouse as the beneficiary, if there was any time lag between the date of death and the time that you actually make the transfer, during that time period the spouse would be subjected to tax.
- With respect to an RRSP you only have the ability to name a beneficiary of that account. And the tax implications are going to differ based on who you name as the beneficiary. So I do want to highlight if you name a beneficiary, there's not going to be any probate fees. And if the beneficiary named is a spouse, there will not be any immediate tax implications. There's actually a deferral opportunity available. However, if you name anyone other than a spouse or a financially dependent disabled child or grandchild, likely there will be a tax implication to the estate.
- And lastly, when we're talking about a RRIF, you do have the option of naming a successor annuitant or a beneficiary. The successor annuitant, if it's your spouse or common law partner, again, they inherit the value on a tax-free basis, as well as there's no probate fees required. If you name anyone other than a spouse as the beneficiary, while there will not be any probate fees, the beneficiaries will inherit the value of the RRIF on a tax-free basis, the estate ends up having to pay-- likely will have to pay taxes on the fair market value of that RRIF.
* OK. What about nonregistered accounts? Can you name a beneficiary or a successor for nonregistered accounts?
* Unfortunately, here in Canada, we do not have the ability to name a beneficiary to nonregistered accounts. Again, that ability is only for registered accounts. But interesting to note-- in other jurisdictions outside of Canada, they may, in fact, have the ability to name a beneficiary to nonregistered. Here in Canada, we don't have that ability.
* What if you don't name anybody for these accounts? Because you don't have to. I mean, you can fill out the forms. And you can just choose not to.
* Correct. You're not obligated to. It is best practice to.
* Agreed.
* And the reason for this is, again, you avoid probate. But if you don't put in place a successor or a beneficiary, what happens is your estate ends up being the beneficiary of your registered accounts. And what that means is if you have a will, it goes to the beneficiaries under your will. If you don't have a will, it gets distributed under intestacy laws.
* What happens-- or I guess I should say, how often should people be updating their beneficiary and successor designations? I feel like you're going to have another cautionary tale for me in this.
* Yes. So the answer with this is you should be periodically updating your documents. Similar to when you update your financial documents, when you update your estate plan, you want to-- any time there's any life changes, marriage, divorce, separation. I do want to let you know that certain provinces have laws in place that indicate if you separate or divorce from a spouse, and you forget to update your will, they actually void provisions to a spouse.
- However, those laws do not affect beneficiary designations. So if you designated your spouse as your successor or your beneficiary, and you subsequently separate from that spouse, or you subsequently divorce from that spouse, that beneficiary will still continue to get it.
* They're still getting it.
* They're still getting the money. You need to update your beneficiary.
* All right. That's a good one. And, finally, who do they need to speak to to make sure that people get a handle on everything?
* You want to first go to the financial institution that holds your registered accounts. Because most financial institutions, TD included, have created their own beneficiary designation forms. Now, whether or not you should fill in that specific financial institutional form, or you should fill out some other form, how you should fill out that form, who you should be naming in that form, that's where the guidance of your lawyer, your accountant, and your financial advisor can be extremely valuable.
* Mindi, thank you.
* My pleasure.
* That is Mindi Banach, Tax and Estate Planner at TD Wealth. And if you have a question for Ask MoneyTalk, please let us know. Send it in to moneytalk@td.com.
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* Today on Ask MoneyTalk, we're answering a common question we're hearing around beneficiary designations for your registered investment accounts. Mindi Banach is Tax and Estate Planner at TD Wealth. She joins me now to weigh in. So the question is, Mindi, what's the difference between a beneficiary and a successor when it comes to my TFSA, my RRSP, and my RRIF? I think we just need to back up and say the definitions of those and why we do them.
* Yes. So the first thing I want to highlight is that whether you're designating a successor or a beneficiary, the primary benefit of doing that is that it allows your registered accounts to bypass the estate, meaning you do not have to go through the probate process. You don't have to pay probate fees.
- Now, what is the difference between a successor and a beneficiary? The only person that you can name as your successor is a spouse or common law partner whereas a beneficiary can be anyone of your choosing.
- Now, more specifically with respect to the TFSA account, you have the option of naming a successor holder and/or a beneficiary. Now, if you name your spouse or common law partner as your successor holder, one of the benefits is that they can automatically transfer your TFSA account into their own TFSA account on a tax-free basis. And they don't need to have their own contribution room to make that transfer. However, if you name a beneficiary, and your beneficiary is not a spouse, while the beneficiary will inherit the TFSA account on a tax-free basis, any income associated with the funds that they inherit is going to be taxed unless that beneficiary can transfer their funds into their own TFSA account. And, again, they would need contribution room in order to make that transfer. I will say that if you plan on benefiting a spouse, there's a little bit more of a tax advantage of naming that spouse as a successor holder because the transfer happens automatically, whereas if you named a spouse as the beneficiary, if there was any time lag between the date of death and the time that you actually make the transfer, during that time period the spouse would be subjected to tax.
- With respect to an RRSP you only have the ability to name a beneficiary of that account. And the tax implications are going to differ based on who you name as the beneficiary. So I do want to highlight if you name a beneficiary, there's not going to be any probate fees. And if the beneficiary named is a spouse, there will not be any immediate tax implications. There's actually a deferral opportunity available. However, if you name anyone other than a spouse or a financially dependent disabled child or grandchild, likely there will be a tax implication to the estate.
- And lastly, when we're talking about a RRIF, you do have the option of naming a successor annuitant or a beneficiary. The successor annuitant, if it's your spouse or common law partner, again, they inherit the value on a tax-free basis, as well as there's no probate fees required. If you name anyone other than a spouse as the beneficiary, while there will not be any probate fees, the beneficiaries will inherit the value of the RRIF on a tax-free basis, the estate ends up having to pay-- likely will have to pay taxes on the fair market value of that RRIF.
* OK. What about nonregistered accounts? Can you name a beneficiary or a successor for nonregistered accounts?
* Unfortunately, here in Canada, we do not have the ability to name a beneficiary to nonregistered accounts. Again, that ability is only for registered accounts. But interesting to note-- in other jurisdictions outside of Canada, they may, in fact, have the ability to name a beneficiary to nonregistered. Here in Canada, we don't have that ability.
* What if you don't name anybody for these accounts? Because you don't have to. I mean, you can fill out the forms. And you can just choose not to.
* Correct. You're not obligated to. It is best practice to.
* Agreed.
* And the reason for this is, again, you avoid probate. But if you don't put in place a successor or a beneficiary, what happens is your estate ends up being the beneficiary of your registered accounts. And what that means is if you have a will, it goes to the beneficiaries under your will. If you don't have a will, it gets distributed under intestacy laws.
* What happens-- or I guess I should say, how often should people be updating their beneficiary and successor designations? I feel like you're going to have another cautionary tale for me in this.
* Yes. So the answer with this is you should be periodically updating your documents. Similar to when you update your financial documents, when you update your estate plan, you want to-- any time there's any life changes, marriage, divorce, separation. I do want to let you know that certain provinces have laws in place that indicate if you separate or divorce from a spouse, and you forget to update your will, they actually void provisions to a spouse.
- However, those laws do not affect beneficiary designations. So if you designated your spouse as your successor or your beneficiary, and you subsequently separate from that spouse, or you subsequently divorce from that spouse, that beneficiary will still continue to get it.
* They're still getting it.
* They're still getting the money. You need to update your beneficiary.
* All right. That's a good one. And, finally, who do they need to speak to to make sure that people get a handle on everything?
* You want to first go to the financial institution that holds your registered accounts. Because most financial institutions, TD included, have created their own beneficiary designation forms. Now, whether or not you should fill in that specific financial institutional form, or you should fill out some other form, how you should fill out that form, who you should be naming in that form, that's where the guidance of your lawyer, your accountant, and your financial advisor can be extremely valuable.
* Mindi, thank you.
* My pleasure.
* That is Mindi Banach, Tax and Estate Planner at TD Wealth. And if you have a question for Ask MoneyTalk, please let us know. Send it in to moneytalk@td.com.
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