RRIF beneficiary designation important in estate planning

When you retire, you can convert your Registered Retirement Savings Plan (RRSP) to a Registered Retirement Income Fund (RRIF) and begin withdrawals. But what if you die before you spend all your RRIF savings?

Your RRIF goes to whomever you designate as beneficiary.

What if you don’t name a RRIF beneficiary and your RRIF becomes part of your estate? Your will determines who receives your RRIF.

But half of Canadian adults don’t have wills. Your RRIF money would be divided among your next of kin according to a formula in a provincial statute. Yes, your family inherits your RRIF. But they’d incur extra costs and delays.

Reduce costs

Designate a beneficiary in your RRIF contract to simplify your estate and reduce probate costs. (Probate is the court process for proving your will’s authenticity, which authorizes someone to manage your estate). Court fees are based on a percentage of the value of your RRIF.

Spouse beneficiary

Normally, if you’re married (or living common law) you’d name your spouse as your RRIF beneficiary. Upon death, your RRIF passes probate-free to your beneficiary spouse. A rollover lets the survivor continue the tax deferred growth.

No spouse

What if you have no spouse? You can create problems if you designate adult children as RRIF beneficiaries to avoid probate costs.

The entire market value of your RRIF becomes taxable income on your final T1 tax return. The tax bill can be as big as 44 per cent of the RRIF value (using Saskatchewan’s tax rates).

Suppose your RRIF value is $300,000 and you have three children. Your executor needs $132,000 cash to pay the tax. The RRIF issuer mails three cheques for $100,000 each (with no tax deducted) directly to the three named beneficiaries.

Can’t the executor simply ask the RRIF beneficiaries to chip in to cover the tax bill? What if one beneficiary has already used the $100,000 inheritance to repay debts, for example, leaving the other two siblings stuck with the tax bill?

Estate as beneficiary

Unless there is only one child, it is prudent for a widow with adult children to designate “estate” as RRIF beneficiary. Probate costs are a small price to pay to preserve family harmony.

Charitable bequest

If you regularly give to charity, should you name your favourite charity as RRIF beneficiary to avoid probate costs? Note, that, starting in 2016, tax rules for charitable donations at death are changing.

Suppose, for example, you die in 2016. Your $300,000 RRIF goes to the charity you designated as beneficiary. Under the new rules, the $132,000 tax liability must be paid when your final T1 tax return is filed. However, it’s still possible for this tax to be refunded after your executor carries back the donation tax credit from the estate T3 return and requests an adjustment to the final T1 return.

What if a cash flow problem arises because your estate does not have $132,000 cash available to pay the T1 tax bill? With the beneficiary designation, the $300,000 RRIF bypasses your estate and goes directly to the charity.

Lawyer Paul Taylor of Borden Ladner Gervais LLP in Ottawa warns that the donation tax credit can only be carried back if the estate qualifies as a “Graduated Rate Estate (GRE).” This necessary GRE status could be jeopardized if the executor uses cash from outside the estate to pay the tax bill on behalf of the estate.

When you review your RRSP and RRIF statements, ensure that beneficiary designations are appropriate. If you name anyone other than your spouse, discuss the ramifications with your lawyer and financial adviser. Terry McBride, a member of

Advocis, works with Raymond James Ltd. (RJL). The views of the author do not necessarily reflect those of Raymond James Ltd. (RJL). Information is from sources believed reliable but cannot be guaranteed. This is provided for information only. We recommend that clients seek independent advice from a professional adviser on taxrelated matters. Securities offered through Raymond James Ltd., member of the Canadian Investor Protection Fund. Insurance services offered through Raymond James Financial Planning Ltd., not a member of the Canadian Investor Protection

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