As a Portfolio Manager and Certified Financial Planner, I commonly see people who believe all their registered accounts (i.e., LIRA, LRSP, RRSP, RRIF, etc.) will end up going to their children when both spouses die. What they neglect to consider is that these registered accounts will likely be fully taxable as income when the last spouse dies and their children may not receive as much as expected.
When people are reviewing their plans for how much to leave their children, they need to ensure that they are deducting the taxes that their estate will owe on their registered accounts. And the tax burden can be large! When you pass away, if your beneficiary is not qualified to receive the funds tax-free*, the full amount of all your registered accounts is immediately added as your income in the year of your death. Think about it this way, in the case of an RRSP worth $150,000, nearly $75,000 which you planned to go to your kids will instead be going to pay your estate’s tax bill.
What’s worse, this scenario can sometimes be avoided with a little bit of forethought. A few common practices to reduce estate taxes from registered accounts is to actively decrease the size of the registered account while you are still alive. Another way to do this is to include a charitable gift in your estate to offset taxes due. Whatever you decide to do, make sure that it is well-informed and intentional.
Don’t leave your children surprised at paying half their inheritance back to the government in taxes.
*qualified beneficiary (or survivor beneficiary) is the annuitant's (registered account holder's) spouse or common-law partner, financially dependent child or grandchild under 18, or the annuitant's financially dependent disabled child or grandchild.
Maria Dawes, Portfolio Manager
Capstone Private Wealth