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Your RRSPs/RRIFs and Your Estate Plan

The RRSP contribution deadline is fast approaching! When considering whether or not to make an RRSP contribution this year, it is also a good time to think about these assets in the context of your estate plan. You will want to confirm whether you have taken the necessary steps with respect to your RRSPs or RRIFs in order to meet your estate planning goals.

It is possible to name one or more individuals as beneficiary(ies) on an RRSP or RRIF. If you do so, upon your death, the amount remaining in the RRSP or RRIF will flow directly to the named beneficiary. These assets do not become part of your estate and your Will will not have any effect upon the distribution of them (unless, for example, you have named your estate as the beneficiary – more on this below).

At death, there is what is referred to as a ‘deemed disposition’ of all of a deceased’s assets. In other words, it is as if the deceased sold all of their assets immediately prior to death. Any capital gains triggered as a result of the deemed disposition must be included in the deceased’s income in the year of death. This can result in a significant tax liability when it comes to a deceased’s RRSP or RRIF as the full value of the RRSP or RRIF is included in the final tax return of the deceased. There are, however, some options for deferring the capital gains with respect to an RRSP or RRIF. For example, a surviving spouse may ‘roll-over’ a deceased’s RRSP or RRIF to his or her own RRSP or RRIF. In some cases, it is also possible to ‘roll-over’ an RRSP or RRIF to a child’s RDSP.

Note that where a beneficiary is named on a RRSP or RRIF, the beneficiary will receive the RRSP or RRIF without deduction for any taxes owing as a result of death. In other words, the beneficiary will receive the full value of the RRSP or RRIF and the deceased’s estate will be responsible for paying the associated taxes which can be significant. This can result in an unequal distribution of an estate where one beneficiary receives the RRSP or RRIF and another beneficiary receives under the Will because the value of the estate is reduced by the taxes owing.

As can be gleaned from the brief summary above, estate planning when it comes to RRSPs and RRIFs can be complex. Consult with a lawyer experienced in estate planning to ensure you have arranged your financial plan in accordance with your estate plan. For a very interesting article explaining some of the most common RRSP myths click here.

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