Do you know what happens to an RRSP when someone dies?

You would assume that your investments like RRSPs would go to your spouse after your death. However, you need to ensure this is the case when it comes to the laws in your province.

RRSPs that are still held at death are paid to the beneficiaries based on the details in the RRSP plan. The person's Will has no power to change that depending on the Estate Laws in the province.

RRSPs owned by someone that has died can only be transferred tax deferred to "qualifying survivors" (the spouse or a child/grandchild that is financially dependent on that person. ie: a disabled dependent) Otherwise, those RRSPs are deemed to be taxable income on the day they die (at full value of the investments), which creates a very large tax bill for the estate.

If the RRSPs are not transferred tax free and the beneficiary is not the estate, then the beneficiary named in the RRSP plan gets all the money and the estate is stuck with the tax bill with no money to cover it.

You can see how this can cause a big expected  problem at an already stressful unhappy time for the executors and beneficiaries.

Things I recommend:

• Make the Estate the beneficiary of the RRSP when there is no qualifying survivor. The money comes to the place where the tax has to be paid. This is especially true in Alberta where we do not have a probate tax. Advice might be different in BC and ON or any province that has a probate tax.
• If there is no qualifying survivor (i.e. single person with no spouse or dependants) plan your retirement finances, so that you use up your RRSPs before you use up other sources of income.
  • If you have a choice of retirement investments to draw from use the RRSPs first, since those are taxed more aggressively then non-registered investments at death
  • This will mean taxes will be paid at lower rates over the years instead of it all being taxed at once at significantly higher rates (due to the marginal tax rate system we have)
• Consult with an accountant about your situation before completing your Will, so you know what will happen in your Estate when you pass away.
  • You want to make sure your intended disbursements to your beneficiaries are actually possible to achieve and all the tax implications of those disbursements

I have seen some significant problems where the residual beneficiaries are different from the named beneficiaries in the RRSP. Suddenly the beneficiary who gets the RRSP directly is so happy because they get the full value and the estate pays all the tax. This leaves a significantly smaller value in the estate to distribute to the residual beneficiaries. This problem can easily be avoided if the right planning is done ahead of time.

To learn more about this, visit the CRA website.