RRSPs and RIFs are a potential nightmare for Will and Estate Lawyers.
Wills and probate lawyers keep an eye on Registered Retirement Savings Plans which must be converted into Registered Income Fund by the end of the year in which the owner turns 71. They offer many opportunities and pitfalls for their owners and wills and estate lawyers, and Estate Litigation Lawyers. They are usually referred to as Registered Assets. They allow beneficiary designations and therefore flow outside a will and are not subject to creditors or probate tax. However, the beneficiary designations are extremely limited and for our older clients we strongly suggest the Full Monty strategy which can remedy those shortcomings. If you want more information on the Full Monty just use the search function on our website.
There are significant tax ramifications. Unless a qualifying beneficiary designation has been made under section 70 (5) & (6) of the Income Tax Act, the entire RRSP or RIF is deemed to have been brought into income immediately prior to one’s death and is taxed in the final tax return. In simple terms if you die owning $100,000 RRSP, all of the $100,000 is treated as income in the last year of your life. A lot of tax will be triggered.
Many people are aware that if they name their spouse (legal marriage or common law), there can be a tax deferral. The RRSP or RRIF is accordingly permitted to be rolled over to ones spouse and is not taxed until the surviving spouse either dies or withdraws money out of the RRSP or RIF. The sarcastic advice we give our clients to eternally delay tax is a series of remarriages to ever younger new spouses.
There are some other exceptions which permit tax free rollovers and these are defined in the Income Tax Act as a qualifying survivor. One can name as a beneficiary an adult child or grandchild who is financially dependent on the deceased due to a physical or
mental impairment.
Another alternative is naming a minor child or grandchild as a beneficiary of an RRSP, but only if they use the funds to purchase an annuity until the age of 18 and then only the income payments will be taxed. The original plan owner’s estate will not have to pay any taxes on these funds, provided the executor makes the required election in the deceased final tax return.
This even applies if no beneficiary designation is made and the RRSP or RIF is payable to the estate. If the beneficiary under the deceased Will is a qualifying spouse and they use those funds to contribute to their own RRSP and RIF a tax deferral can be accomplished. Again, there is an election that is required to be made by the executor.
Another RRSP issue is taking advantage of the tax-free rollover status when there are a number of potential beneficiaries, such as a surviving spouse and adult children from an earlier marriage. It requires a careful division especially if the willmaker wants to equalize the various assets formally in and out of their estate. Making the shares equal, when registered assets are involved is not a simple exercise for even Wills and Estates and Wills and Probate lawyers. You need to find one with experience and a hallmark of that, is the answer to the question, what portion of the lawyers practice is devoted to wills and estates? The irony is, the smaller the percentage, the cheaper the fee, and the lower the quality of the work provided.
