Why Naming a Beneficiary (Other than Your Spouse) for your RRSP Can Mess Up Your Estate Planning

157841598_926f2d6133_zI was chatting with someone recently who thought he might need to look after a Will. He was into his second marriage and had a son from a previous marriage. “Oh, I don’t need more than a simple Will,” he said, “my wife gets everything other than my RRSP. I have named my son as beneficiary for my RRSP.” Aside from the difficult balancing act in wills for blended families, his estate is going to have a wee problem. RRSPs pass tax-free to a spouse, but if they are left to anyone other than a spouse, they trigger taxes for the estate (which is largely comprised of what we leave when we do a Will).

In this scenario, the son would get the money tax-free since the RRSPs aren’t an asset that is part of what gets divided under a Will, and his wife would get the tax bill for the RRSPs since she’d have what is left under the Will, which can be a significant amount. If nearly all of his assets are his RRSP savings, it could mean that there is very little left for his wife.

I was talking to another person who handled this by naming her estate as the beneficiary for both her RRSP and her life insurance. That is better – if she doesn’t have a spouse. In her case, she didn’t. That means that the people named in her Will will have both the tax burden and the benefit of the RRSPs, which is much fairer. The downside is that their inheritance will be subject to the 1.4% probate fee charged in BC, and it will likely take over a year from her death for her beneficiaries to receive the money, as the probate process can take a very long time. If the RRSP were to go to a named beneficiary under the plan, it would be paid out comparatively quickly.

She had also named her estate as the beneficiary of her life insurance. There are worse ways to do that, I suppose, but the life insurance would be exempt from the 1.4% probate fee if it named a person as the beneficiary rather than her estate and it would also be distributed within weeks rather than over a year if it is brought into the Will (usually life insurance has the benefit of being paid out almost immediately after a claim is made on the policy).

This is not meant to constitute legal advice. Please speak to your lawyer for advice for your own situation.



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