Beneficiary designations

You no doubt thought long and hard in deciding on the beneficiaries to include in your will. But your will isn't the only document you can use to name beneficiaries.

Registered Plans

"You can usually designate direct beneficiaries for Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs)," says Christine Van Cauwenberghe, LL.B and Director of Tax and Estate Planning, Advanced Financial Planning Support at Investors Group. "If the beneficiary is your spouse, or a dependent child or grandchild, the tax-deferred status of your registered assets can be maintained." (Direct beneficiary designations on registered assets are not available in the province of Quebec.)

Making the designation directly can have some unexpected results. For example, suppose you have a spouse and an adult daughter from a previous relationship, and you want them to benefit equally from your assets after you die. You can leave your $200,000 RRSP to your spouse, and $200,000 in cash to your daughter.

Upon your passing, the $200,000 RRSP will typically be paid without withholding taxes to your spouse. Unless your spouse opts to take the spousal “rollover” and apply the RRSP to a new RRSP in his or her name, the $200,000 will be considered income on your final tax return, Payment of the income tax on the RRSP would be required to come out of the other estate assets—the $200,000 cash left to your daughter; meaning she will receive less than you intended

Your estate as beneficiary

In certain circumstances, there can be advantages to naming your estate as the direct beneficiary of your RRSP or RRIF and granting your executors the authority to make tax-deferred rollovers possibly reducing the taxes payable on your assets.

Take the same example as above but designate your estate as the beneficiary. Your will could still direct the $200,000 RRSP to your spouse, but you could give your executor the authority to only pay the “after-tax” amount if your spouse did not take the full rollover. That would leave the $200,000 of cash to be distributed to your daughter under the terms of your will. This strategy could help ensure that the people you care about inherit the money you intended.

Life Insurance

Life insurance is often purchased to cover outstanding estate debts and taxes that arise upon death. Proceeds typically pass tax-free to the named beneficiary.

But if you name your estate as the beneficiary, the proceeds will become part of the estate's value and be subject to probate. In provinces with high probate fees, such as Ontario and British Columbia, the cost can be significant. (Probate does not generally apply in the province of Quebec.)

"By designating an individual as a beneficiary, the proceeds pass outside the estate and are not subject to probate," advises Van Cauwenberghe. "Before naming a beneficiary, however, consider whether your executor might need access to those funds to carry out your final wishes."

Another alternative may be the use of a life insurance trust, which allows the funds to be distributed according to the terms of the trust (which may form part of the deceased's will), but still avoids probate fees. If a life insurance trust is properly set up, you may be able to get the best of both worlds.

Professional advice

As you can see, selecting beneficiaries is a lot more complicated than simply deciding "who gets what." You also have to keep in mind the possible implications of provincial family and pension laws.

It's wise to seek professional input when designating beneficiaries and to review those designations if your life changes significantly. For example, a change in marital status, the death of a beneficiary, and similar events may require you to make a specific change.

Your Investors Group Consultant can work with you and your tax and legal advisors to help ensure that your estate is distributed according to your wishes.

--------------------------
This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.