Who will inherit your RRSP assets?

Most we will use to of us think of our Registered Retirement Savings Plan (RRSP) savings as the money fund our retirement. But what would happen to those savings if your RRSP became part of your estate? While there are many tax-effective ways to distribute registered assets, there are also certain rules that can trip you up.

Tax-deferred rollover. If you name your spouse or common-law spouse as the beneficiary of your RRSP, the assets can be rolled over with no immediate tax implications, and without affecting the surviving spouse’s RRSP contribution limit.

By making the designation directly in the RRSP, the registered assets will not form part of your estate. As a result, they will not attract probate fees.

Bequests to minor children. Another tax-effective option is to leave RRSP assets to a financially dependent child or grandchild. If the child is a minor, the proceeds can be used to purchase a term-annuity to age 18. If the financially dependent child or grandchild is over 18, the proceeds will be included in his or her income.

If you have a financially dependent child or grandchild who is mentally or physically infirm, the proceeds can be transferred tax-free to his or her RRSP, or can be used to buy an annuity.

Bequests to other family or friends. If you plan to leave your RRSP to someone else, such as an adult child, sibling, or friend, the proceeds will be fully taxable upon death — and there may be implications for your other beneficiaries.

For example, if you name one of your adult children as beneficiary of your RRSP, the proceeds will go to that child but the tax liability will go to your estate. This might leave less money than you had intended for the other children.

One solution is to name your estate as beneficiary and leave a portion of the RRSP proceeds — such as the remainder after taxes and probate fees — to that child through your will.

Bequests to charity. If you want to leave your RRSP to charity, you can name your estate as RRSP beneficiary and leave instructions in your will that an amount equal to the value of the RRSP be transferred to one or more named charities. To offset the tax on the proceeds, your estate can claim a charitable donation tax credit.

Thanks to recent legislative changes, you can also make the designation directly in the RRSP and your estate can still claim the charitable donation tax credit.

Preserving RRSP assets. Naming a spouse or financially dependent child as beneficiary can defer or reduce taxes on your RRSP assets, but it can’t eliminate the tax liability. Life insurance can be used to cover the taxes, preserve the full value of your RRSP assets, and assure an equitable inheritance for each family member.

Professional advice can help you plan RRSP bequests in a tax-effective way to meet your estate planning goals.