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Registered Retirement Plans with named beneficiaries: Lessons and Considerations

Investments, Personal Finance

Posted by Peter Wouters

Jun 13, 2016 9:59:06 AM

Directeur, Planification fiscale et successorale et planification de la retraite, Gestion de patrimoine
Placements Empire Vie

In my last post, I shared the issue of naming an adult, independent child as a beneficiary of a registered retirement plan, (either a Registered Retirement Savings Plan or a Registered Retirement Income Fund (income version). (see Registered Retirement Plans with Named Beneficiaries: Unintended Consequences ) You may wish to avoid paying probate and estate costs on your plan. You may want to make the transfer as seamless and efficiently as possible. You may want to leave someone something extra. One issue is that the person receiving the money usually pays no tax. The estate usually pays the tax. The Canada Revenue Agency first looks to the estate to pay any income taxes owing. Only when there are insufficient monies in the estate, does the Canada Revenue Agency assess the beneficiary of the registered retirement plan for any balance owing. That means the beneficiaries in the will shoulder the tax bill. Is that the intention?

In the Morrison case settled in Alberta late in December 2015, Justice Graesser found that the deceased father probably did not intend for the estate to pay the income tax on the registered retirement income fund left to one son. The judge felt that the deceased father was either mistaken about or unaware of the income tax consequences of the beneficiary designation and that the father would not have wanted the estate to pay the tax on the registered retirement income fund. The judge ruled that the beneficiary son reimburse the estate for the income tax it had paid for him.

This situation is not unusual. Beneficiaries of an estate who find themselves in a similar situation can come to an agreement that the beneficiary of a registered retirement plan pay the portion of the taxes assessed in the estate that relate to the deemed disposition of that plan. They may want to go one step further and try to obtain a court order to that effect. If they don’t, then the payment could be considered a contribution to the estate and would taint a graduated rate estate. This would result in the estate now being taxed at the maximum income tax rate on all deemed and actual earnings. (see Estate Qualifying as Graduated Rate Estate (GRE) Jan 1, 2016 Onwards)

Why have courts guess what you were thinking? You can clarify what you want to have happen. Many testators’ intentions aren't clear or consistent with documentation like wills. One option could be to write a Declaration of Intention. It would spell out your intention regarding who is to pay the income tax on the entire value of the registered retirement plan that is triggered on your death. Another option could be to name the beneficiary of the plan in the will and specify that the amount that person receives is net of income tax on that money. A third option could be to buy life insurance. The life insurance proceeds can be payable to the estate and used to pay off the income tax bill.

Alternatively, it could be paid to other beneficiaries of the will to equalize their share of the estate after the income tax is paid on the registered retirement plan. Make your intentions clear by discussing your estate planning with all of your children present and by obtaining proper legal advice. Stress test your plans and documents to make sure they continue to do the things you want them to do.

This is another one of those "don't do by yourself" exercises. Do it for yourself; do it for your heirs; do it with accredited professionals including lawyers, tax specialists and financial advisors.