You’ve got life insurance in place, you’re saving for retirement and you have a company pension. You appear to have it all together when it comes to your finances, but are your beneficiaries all up to date? If they aren’t, despite all your good planning it could have a detrimental effect on even the most thorough estate plans. Georgia Swan, Tax and Estate Planner with TD Wealth, joins Kim Parlee to talk about the importance of beneficiaries.
Print Transcript
- So let's say that you have your life insurance in place. Check. You have your savings ready for your retirement. Check. You have a company pension. Check. But what about beneficiaries? If you're not saying check to that, that could be an issue. And Georgia Swan is a tax and estate planner at TD Wealth, and she's here to tell us why it's so important.
Georgia, always a pleasure to have you with us. Two things I think we need to start with is, first, what goes wrong if you don't have a beneficiary, and why it's important, and then we'll talk about what it is. But let's start with what goes wrong. Why is it so important?
- So the bottom line, Kim, is that if you don't have a designated beneficiary of your registered accounts, like RSPs, RIFs, TFSAs, or pensions or insurance, that money may not go to the person that you actually want it to go to. Or if the designated beneficiary is an old one, and your life has changed or the people in your life have changed, it may still go to the person that you have on record, and not to the person that you would want it to go to right now. It can also cause tax consequences.
- Got it, OK. So I'm especially thinking about those examples of new marriages, those types of things, money going to the wrong person. That can be upsetting for many people when these things happen. So let's back up, then, one more step. What is a beneficiary? And specifically, how is it defined?
- So as I said, when it comes to registered accounts like TFSAs, RIFs, RSPs, and things like pension plans or insurance policies, you can actually state who you want that asset to go to when you die. And that's what a beneficiary is, who do you want to benefit from that asset. And so basically, in most cases, the institution with which you have that asset will give you the ability to, with them, register who you want that person to be. And it can actually be a person, so your spouse, common law spouse, a child, for example, or it can be a charity or another relative or friend. But there are different consequences to the different people that you might name, or entities, for that matter, that you might name as the beneficiary.
- So it's interesting because you said these are the ways you can do it, you can do it with the institution where the asset is. But are there other ways to do it, and are there optimal ways to do that?
- OK, the optimal way is whatever is the right way for your particular situation. So let's start with that. But yes, while most people are used to naming beneficiaries with the institution that you have the asset, in most provinces, you can actually also name the beneficiary in your will or in another document. The problem is most people think, oh, I don't want to name it in my will because that will automatically create probate. In other words, that asset will go through the will through my estate. But that's not true.
As a matter of fact, there are very legitimate ways for designating the beneficiary in your will that still avoids probate. And sometimes, that is the preferred way, especially if, for example, you're planning on naming a minor child as the beneficiary, because they can't inherit. And if you accidentally name the minor child as the beneficiary without putting the money in trust, it'll be paid into court until the child becomes 18. If it's a vulnerable adult beneficiary, somebody who can't manage their own money, that's another reason that you want to actually deal with the beneficiary designation in your will, again for a trust.
As well, let's say you want to name a second spouse, but you have children from an earlier relationship. You want the spouse to be able to have access to the money, but anything left over you want to go to your children from that earlier relationship. All of those examples are examples where you actually may not want to name the beneficiary with the institution, but you might want to deal with it in your will. And as I said, there's ways to do that while still avoiding that dreaded probate that everybody wants to avoid.
- The one thing that I'm hearing from what you're saying is this is very bespoke. It depends on the person, it depends on the situation, it depends on the assets, it depends where they live. So it's really important that they speak to somebody to optimize, to your point, what it all is. I know that I've heard something about beneficiaries, different types of beneficiaries, and also things like successors. What's the distinction there?
- Well, if you are naming a spouse, whether it's a married spouse or a common law spouse, as the person to whom you want this asset to go, you have the choice of naming them as the beneficiary or, if it's a RIF, as a successor annuitant, and if a TFSA, as a successor holder. And there are different implications of those two types of designations.
For example, if you name a spouse, whether it's common law or married, as a successor annuitant successor holder, that spouse actually steps into your shoes from the moment that you pass with respect to that asset. Otherwise, if you name them as a beneficiary, the asset is actually collapsed, and then that money is transferred to their own TFSA or RSP or-- I'm sorry, or their RIF, without affecting any contribution room. And there are very important tax reasons, and sometimes other reasons, where you would want one or the other. So it's-- again, I can't say this enough, it's important to make sure that you get the proper advice about which one.
- I hear the idea about, again, getting your own individual advice for understanding, but just one more question for you in terms of a few generalities. Are there any special rules about things like RESPs or RDSPs? Any other specific issues?
- Actually, there are. And especially, if I could leave one tip with respect to RESPs that a lot of people forget, it's very important to name a successor subscriber of an RESP in your will if you want that money to continue to be held for the education of a child. Otherwise, it's collapsed, and it forms part of your estate. So when it comes, again, to RESPs and RDSPs, get good advice.
- Always great to talk to you, Georgia. Thanks so much.
- Thanks, Kim. Good to see you again.
- Georgia Swan, tax and estate planner with TD Wealth.
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Georgia, always a pleasure to have you with us. Two things I think we need to start with is, first, what goes wrong if you don't have a beneficiary, and why it's important, and then we'll talk about what it is. But let's start with what goes wrong. Why is it so important?
- So the bottom line, Kim, is that if you don't have a designated beneficiary of your registered accounts, like RSPs, RIFs, TFSAs, or pensions or insurance, that money may not go to the person that you actually want it to go to. Or if the designated beneficiary is an old one, and your life has changed or the people in your life have changed, it may still go to the person that you have on record, and not to the person that you would want it to go to right now. It can also cause tax consequences.
- Got it, OK. So I'm especially thinking about those examples of new marriages, those types of things, money going to the wrong person. That can be upsetting for many people when these things happen. So let's back up, then, one more step. What is a beneficiary? And specifically, how is it defined?
- So as I said, when it comes to registered accounts like TFSAs, RIFs, RSPs, and things like pension plans or insurance policies, you can actually state who you want that asset to go to when you die. And that's what a beneficiary is, who do you want to benefit from that asset. And so basically, in most cases, the institution with which you have that asset will give you the ability to, with them, register who you want that person to be. And it can actually be a person, so your spouse, common law spouse, a child, for example, or it can be a charity or another relative or friend. But there are different consequences to the different people that you might name, or entities, for that matter, that you might name as the beneficiary.
- So it's interesting because you said these are the ways you can do it, you can do it with the institution where the asset is. But are there other ways to do it, and are there optimal ways to do that?
- OK, the optimal way is whatever is the right way for your particular situation. So let's start with that. But yes, while most people are used to naming beneficiaries with the institution that you have the asset, in most provinces, you can actually also name the beneficiary in your will or in another document. The problem is most people think, oh, I don't want to name it in my will because that will automatically create probate. In other words, that asset will go through the will through my estate. But that's not true.
As a matter of fact, there are very legitimate ways for designating the beneficiary in your will that still avoids probate. And sometimes, that is the preferred way, especially if, for example, you're planning on naming a minor child as the beneficiary, because they can't inherit. And if you accidentally name the minor child as the beneficiary without putting the money in trust, it'll be paid into court until the child becomes 18. If it's a vulnerable adult beneficiary, somebody who can't manage their own money, that's another reason that you want to actually deal with the beneficiary designation in your will, again for a trust.
As well, let's say you want to name a second spouse, but you have children from an earlier relationship. You want the spouse to be able to have access to the money, but anything left over you want to go to your children from that earlier relationship. All of those examples are examples where you actually may not want to name the beneficiary with the institution, but you might want to deal with it in your will. And as I said, there's ways to do that while still avoiding that dreaded probate that everybody wants to avoid.
- The one thing that I'm hearing from what you're saying is this is very bespoke. It depends on the person, it depends on the situation, it depends on the assets, it depends where they live. So it's really important that they speak to somebody to optimize, to your point, what it all is. I know that I've heard something about beneficiaries, different types of beneficiaries, and also things like successors. What's the distinction there?
- Well, if you are naming a spouse, whether it's a married spouse or a common law spouse, as the person to whom you want this asset to go, you have the choice of naming them as the beneficiary or, if it's a RIF, as a successor annuitant, and if a TFSA, as a successor holder. And there are different implications of those two types of designations.
For example, if you name a spouse, whether it's common law or married, as a successor annuitant successor holder, that spouse actually steps into your shoes from the moment that you pass with respect to that asset. Otherwise, if you name them as a beneficiary, the asset is actually collapsed, and then that money is transferred to their own TFSA or RSP or-- I'm sorry, or their RIF, without affecting any contribution room. And there are very important tax reasons, and sometimes other reasons, where you would want one or the other. So it's-- again, I can't say this enough, it's important to make sure that you get the proper advice about which one.
- I hear the idea about, again, getting your own individual advice for understanding, but just one more question for you in terms of a few generalities. Are there any special rules about things like RESPs or RDSPs? Any other specific issues?
- Actually, there are. And especially, if I could leave one tip with respect to RESPs that a lot of people forget, it's very important to name a successor subscriber of an RESP in your will if you want that money to continue to be held for the education of a child. Otherwise, it's collapsed, and it forms part of your estate. So when it comes, again, to RESPs and RDSPs, get good advice.
- Always great to talk to you, Georgia. Thanks so much.
- Thanks, Kim. Good to see you again.
- Georgia Swan, tax and estate planner with TD Wealth.
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