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Keep Your RRSP Beneficiary Designation Up To Date

Feb. 11, 2013
3 mins
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In the rush to make the RRSP deadline, investors often fail to review a critical estate planning detail: namely, who they’ve selected as their RRSP beneficiary in case of death.

If you opened your RRSP account several years ago, you’ve likely forgotten just who you originally chose. More often than not, first-time plan holders opt for one of their parents or a sibling as beneficiary.

There’s nothing wrong with any of those choices. Nonetheless, this would be a good time to review that decision, especially if your situation has changed and you’ve now got a partner or have even started your own family.

Reassessing Your Relationships

If you're married or living in a common-law relationship (and that includes same-sex couples), you're probably better off to name your spouse or partner as the beneficiary.

This way, your RRSP assets can be rolled over to his or her plan at your death, allowing the family to avoid paying tax until the surviving spouse is faced with his or her own final tax return. The same goes for other “qualified beneficiaries” – which could include a financially dependent child or grandchild as well.

Other than that, the tax authorities will consider that you essentially sold your RRSP just before death, resulting in all of it being treated as taxable income for that year.

Additional Beneficiary Options

You can always name your estate as the beneficiary and then leave that estate to those you choose. In this instance though, probate fees will apply. In Ontario, that could mean close to 1.5 per cent of the total value – although fees vary depending on the province you live in.

On the other hand, if you die and have designated a specific beneficiary, your RRSP gets cashed and that person or group will see the full value as the funds pass outside the will, without probate. Either way, of course, there’ll be taxes to pay – unless the person on the receiving end is one of those qualified beneficiaries.

Where can things go wrong? Well, one Ottawa widow was surprised to find that, when her husband died, he had left all of his RRSPs to his only brother and the balance of his estate to her.

But, because there was no RRSP spousal rollover possible, thousands of dollars in tax came out of her share of the inheritance while her brother-in-law received the full value of the RRSPs intact. Not only was that not the original intent, but it created a family rift that could have been avoided.

Keep Your Plan Up To Date

Don’t think that a beneficiary designation is a substitute for a will though. Along with everything else, you still need to consider who might receive your RRSP if your beneficiary predeceases you or you and your partner die together in an accident, for instance.

Even if your RRSP seems modest at the moment, not keeping track of such items can scuttle your estate plan and lead to squabbling among your heirs, warns Ed Olkovich, a Toronto estate lawyer and author of Breakthrough Estate Planning.

Periodically revisiting designations is important, he adds, especially given current divorce rates and the rise in blended families.

No estate plan will work if it’s out of date, Olkovich notes. Birth, adoption, divorce, marriage, death, and other factors may change the beneficiaries in your will or the assets you plan to leave them.

For example, your ex-spouse might still be named as the beneficiary of your RRSP. If you’ve remarried though, this likely won’t endear you to your current partner.

Gordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a consulting firm focusing on retirement readiness. Gordon was a columnist for the Globe & Mail and Morningstar for many years and is also currently a columnist for Investment Executive, Canada’s national newspaper for financial advisors.

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