RETIREMENT & ESTATE PLANNING
Can I leave money to my family with fewer fees and delays?
You’ve worked hard for what you have. You’d like as much of it as possible to reach the people you’re leaving it to, without unnecessary costs or delays.
There are Canadian options that can help. No need for a secret stash of gold coins buried in the back yard.
Some investments can go directly to your beneficiaries
Segregated fund contracts and insurer-issued guaranteed interest accounts (GIAs) generally allow you to name a beneficiary other than your estate. On death, the proceeds can go directly to that person, bypassing probate on those amounts.
This can save time, reduce estate costs and offer greater privacy.
The choice depends on what you need from the money while you’re alive:
- Segregated funds offer market growth potential, along with maturity and death benefit guarantees. Your investment can rise or fall, and the guarantees have conditions. Fees also need to be considered.
- GIAs offer a guaranteed interest rate for a chosen term. They may suit money you want to keep out of the markets, although access before maturity depends on the contract.
There can also be tax advantages for non-registered money
If you hold segregated funds outside an RRSP, TFSA or other registered plan, they have some useful tax features.
For example, capital losses realised within the fund can be allocated to you. You may then be able to use those losses against capital gains from other investments. Unused net capital losses can generally be carried back 3 years or forward to future years.
The insurer also tracks your adjusted cost base and reports the taxable activity, which can make tax preparation easier.
These features can help with tax planning and record-keeping. Whether they suit you depends on the investments, fees and your circumstances.
In Ontario, “probate fees” are actually a tax
The formal name is Estate Administration Tax. In 1998, the Supreme Court of Canada ruled that Ontario’s probate levy was a tax rather than a fee for a service.
Currently, the first $50,000 of an estate’s value is exempt. Above that, the tax is $15 for each $1,000, or part thereof, included in the estate certificate calculation.
So, keeping eligible proceeds outside your estate can reduce that tax. It may also reduce some of the work and costs involved in settling the estate.
Registered accounts need a little more care
RRSPs and RRIFs can also pay directly to named beneficiaries. The same can apply to LIRAs and LIFs, subject to pension rules and a spouse’s entitlement. You don’t need segregated funds to use this feature.
There’s a point worth checking here: bypassing probate doesn’t mean bypassing income tax.
Unless a qualifying rollover or another exception applies, the account’s value at death is generally reported on the deceased’s final income tax return.
The estate normally pays that tax. However, CRA can also collect from the beneficiary for the portion attributable to the registered proceeds they received. It doesn’t have to try every avenue with the estate first.
Suppose one child receives your RRSP directly and another receives what’s left in your estate. If the estate pays the tax on the RRSP, the second child’s inheritance could be considerably smaller than you intended.
Who gets the money, and who pays the tax?
Check both before deciding how to leave the money.
Your beneficiary designations, will and tax planning need to work together. There also needs to be enough money available to pay the bills. Life insurance can help provide that money through a generally tax-free death benefit.
In my work with families, I find these details are often worth revisiting. What made sense when an account was opened may no longer reflect the family’s circumstances or wishes.
If this hasn’t come up in your planning, let’s talk. I can help you review the options and work with your lawyer or tax professional where needed.
What’s your plan, and have you reviewed it lately?
David D. Seemungal, EPC
Senior Insurance & Investment Advisor
I help people make clearer decisions today, before life forces harder ones later.
For general information only. Tax treatment, beneficiary rights and probate rules depend on your circumstances, applicable legislation and contract terms.