Estate Planning Options For Your TFSA
Tax Free Savings Accounts have become a popular saving and investment vehicle for many Canadians. They have also potentially become a significant portion of retirement savings.
When TFSAs were first introduced I thought they were pretty straightforward. However, we still get lots of questions, and Gordon Pape wrote an entire book about them (The Ultimate TFSA Guide), so there’s still some confusion.
A lot has been written about how to invest within a TFSA, but what happens to these funds when the planholder dies? The amount in the account at the date of death is tax fee – then it depends on who the funds are given to.
Estate Planning For Your TFSA
There are three different estate planning options for your TFSA:
- Appoint a successor holder
- Designate a beneficiary
- Assign the funds to the estate
Successor holder
Only a spouse or common-law partner can be appointed successor holder.
The benefit is the TFSA is transferred to your spouse directly without probate fees or a waiting period.
The plan continues to exist on a tax-free basis and the spouse becomes the new account holder, although it will no longer have any contribution room.
If the successor holder already has their own TFSA, they then would be a holder of two separate accounts. The spouse can make new contributions to the account subject to their own unused contribution room.
If they wish, they can directly transfer part, or all, the value to their own TFSA to consolidate the accounts, making it easier to manage. This would be considered a “qualifying transfer” and would not affect available contribution room.
The spouse can also cash in the TFSA with no tax consequences.
Designated beneficiary
A designated beneficiary can be a spouse, or anyone else you name. At the death of the planholder, the beneficiary will receive the assets at the time of death tax free, and the plan will be terminated.
Any income earned after date of death is taxable in the hands of the beneficiaries.
If the beneficiary is a spouse or common-law partner, he or she can transfer all or part of the TFSA (the amount at time of death) to their own account without impacting their own contribution room. To be considered a qualified “survivor” payment, the funds must be transferred within the “rollover period” which is from the date of death to December 31 of the following year.
However, any growth after death would require new or unused TFSA contribution room and is subject to tax.
Avoid naming a spouse together with other beneficiaries because then the spouse won’t receive survivor status.
Naming the estate
You can name your estate as beneficiary and, if no successor holder or individual beneficiary is designated, the TFSA will become part of the estate. The funds will be distributed in accordance with the deceased’s will. Any income earned after death is included in the taxable income and paid by the estate.
Final thoughts
Determining the type of beneficiary is important and can be affected by:
- the designation set up in the planholder’s TFSA contract
- the provisions of the will
- provincial legislation
When I opened my TFSA, Alberta did not allow the successor holder designation, but most provinces have now updated their laws to allow for it. Quebec is the exception, only allowing beneficiary designation through the deceased’s will.
You’ll want to double check with your TFSA administrator to determine whether a successor holder has been named for your spouse.
Thank you for this timely article, currently convincing my dad to include beneficiaries in his TSFA.
Thank you. This has been something that I’ve been thinking of doing, changing from beneficiary to successor holder.
My question is, can my wife also be named Successor Holder for my RRSP accounts.
@Brad. Not for RRSPs, but when you switch to a RRIF it becomes a new contract and you have the successor holder option for your wife then.
Hi Brad,
An RRSP can be rolled over on a tax deferred basis to a qualifying spouse in most cases.
There is a detailed post addressing this on the CRA website:
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/trnsfrrng/dth-eng.html
Speak with your financial advisor if you require further info!
Cheers
Thank you for your clarifying the options. The successor and the beneficiary are defined so differently. Does the successor have priority over the beneficiary in the case of TSFA holder accident death? If a successor ( spouse ) and a beneficiary ( a child) are both designated at same time in 100%, which one gets it first? or it must be designated in percentage.
Hi James. The spouse always gets first dibs. You can’t assign a successor holder AND a beneficiary – one or the other. If you designate your spouse as beneficiary with someone else – child for example – the spouse won’t qualify for the “survivor” transfer to their own TFSA. What will happen then is the deceased’s TFSA will be terminated and the money will be given to the beneficiaries equally.
Hi Boomer. I have TFSA’s at both TD Canada Trust and Phillips, Hager & North (RBC). In both cases I was able to name my spouse as Successor Holder, and my son as Contingent Beneficiary. The designation form states: ” If the person identified above (Successor Holder) predeceases me, I designate the person(s) identified below as the Beneficiary(s) of my TFSA.”
I was told to leave everything to my estate to ensure a Hansen” Trust.
If I do that won’t probabte create a big tax to be paid by my estate. I am in Ontario
Hi rhonda. A Henson trust is set up for disabled persons who inherit so they don’t lose their provincial benefits (not available in all provinces). I can’t see why you can’t name your child as beneficiary of your TFSA, but there could be clauses in the trust agreement that say the funds have to come from the estate. You have to check with your trust administrator.
If that’s the case, the probate fee would be worth paying so the government benefit program won’t be reduced or terminated.