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Beneficiary designations matter more than many people realize. Every so often, we hear about situations where an outdated beneficiary designation overrides instructions in a will; for example, when a registered account names a former spouse, resulting in assets being paid directly to that individual regardless of the current will.1,2
In many cases, the issue stems from beneficiary designations being overlooked or forgotten after accounts are opened. As life circumstances change, years can quickly pass without these instructions being remembered and reviewed.
However, beneficiary designations on registered plans — such as RRSPs, RRIFs and TFSAs* — carry broader implications, even beyond outdated instructions. They can affect the administrative efficiency, tax treatment and ultimate distribution of your assets. Reviewing these designations periodically can help ensure they remain aligned with your objectives.
Why Name a Beneficiary?
Designating a beneficiary offers several advantages:
- Ease of transfer — Plan assets can pass directly to the beneficiary, bypassing the probate process, which often delays distribution.
- Reduced estate costs — Probate or estate administration fees may be avoided (depending on the jurisdiction).
- Flexibility — Beneficiaries can differ from those named in a will.
Tax Implications of Beneficiary Designations
Naming certain beneficiaries can defer or reduce taxes on registered plans:
- Tax Deferral — Tax can generally be deferred if the RRSP/RRIF beneficiary is the deceased annuitant’s: i) spouse/common-law partner; ii) financially dependent (grand)child under the age of 18; or iii) financially dependent mentally or physically infirm (grand)child of any age. In the latter two cases, several other additional conditions need to be met.
- Tax Minimization — Naming a registered charity as a beneficiary may generate a charitable tax credit to offset taxes due on the plan
Understanding the “Successor” Designation
For RRIFs and TFSAs, naming a spouse/partner as a successor, rather than just a beneficiary, can offer additional tax and administrative advantages:
- RRIF Successor Annuitant — The successor can continue operating the RRIF as the new annuitant, with the minimum annual payment remaining the same as established for the deceased.
- TFSA Successor Holder — A surviving spouse or common law partner who is named as successor holder assumes ownership of the existing TFSA without using any of their own TFSA contribution room. The account continues uninterrupted, and income earned in the TFSA remains tax-free for the successor holder. Any future contributions to the account, however, are subject to the successor holder’s available TFSA contribution room.
When Was the Last Time You Reviewed Account Beneficiaries?
Regularly reviewing and updating beneficiary designations helps keep your estate plan aligned with your wishes, protects loved ones and can maximize what you pass on. If you haven’t reviewed yours recently, now is a great time. Please get in touch, and always consult legal and tax professionals to ensure your designations support your broader estate planning goals.
*Note: In Quebec, beneficiary designations are generally not recognized on these plans. Related assets are distributed through the individual’s will or marriage contract.
