Understanding beneficiary designations on your investments

When it comes to estate planning, it is my experience that little is understood about beneficiary designations. First of all, only certain types of investments and insurance policies permit beneficiary designations. A beneficiary designation allows certain assets and insurance proceeds at death to be paid directly to an individual or individuals without going through the deceased’s estate. There are two key benefits of beneficiary designations: first, the assets or insurance proceeds avoid probate fees (in Ontario, 0.5 per cent on the first $50,000 and 1.5 per cent thereafter) and, second, avoid the delays in receiving the proceeds if a Will is required to be probated (to declare that the Will is the last Will and testament).

The most common types of assets and insurance that a beneficiary can be designated for are RRSP’s and RRIF’s; TFSA’s; RESP’s; pension plans; segregated funds, annuities and life insurance policies. Let’s look at each of these more closely.

RRSP and RRIF Accounts

If a spouse is named under a RRSP or RRIF account, the funds can be rolled-over or transferred on a tax-deferred basis on the death of the accountholder. Any future withdrawals or income would be taxed in the hands of the spouse. If children or another individual is named as the beneficiary, it is important to note that 100 per cent of the proceeds are paid out to the beneficiary, however, the proceeds are fully taxed to the Estate of the deceased. This is especially important to know before you name one child as beneficiary of your RRSP or RRIF and the other child or children as beneficiary of an asset that passes through your Estate. Also, if you plan on leaving money to a charity, it might be wise to name a charity of all or part of your RRSP or RRIF since the charitable tax credit can offset the taxable income from the RRSP/RRIF.

Tax-Free Savings Accounts

TFSAs have two different designations at death. You should designate your spouse as a successor holder so the proceeds can be transferred directly into your spouse’s TFSA thereby enjoying the tax-free investment earnings on the total balance of both accounts. There are also regular beneficiary designations for all other individuals including children. The proceeds at death of the plan holder are paid directly to these beneficiaries; however, they cannot be transferred directly into a TFSA of the beneficiary.

RESP Accounts

RESP accounts can be set up as a single or family plan. For RESP’s, the beneficiary is a child or children. Unlike all the other types of accounts mentioned in this article, the benefit or proceeds are not paid as a result of the death of the plan holder, however, the benefits or proceeds are paid to the beneficiary when he or she attends a qualified educational program.

Pension Plans

If a spouse if named as a beneficiary under a pension plan, the proceeds at death can be unlocked and transferred or rolled-over to a RRSP or RRIF; or purchase a life annuity. If no spouse exists, then the proceeds can be paid to a name beneficiary or the estate. In this case all proceeds are taxable to the Estate.

Non-registered Segregated Funds, Annuites and Life Insurance policies

You can name a spouse, children or other individuals as beneficiaries under these types of accounts. All proceeds are paid tax-free to the beneficiary and, in addition, there are no probate fees charged to these assets. Other non-registered assets such as savings accounts, GIC’s, Canada Savings Bonds, and mutual funds do not permit beneficiary designations. At death of the account holder, all proceeds automatically go into the estate of the deceased and are governed by the terms of the Will.

Understanding beneficiary designations on your investments
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