Seek good advice on beneficiary designations

Last week, we talked about some of the advantages and the cautions when using joint title designations on properties or investments, as an estate planning tool.

Today, we will drill down into beneficiary elections, focusing on locked-in retirement accounts, life income funds and insurance company segregated investment funds.

Thanks to Christine Van Cauwenberghe of Investors Group, who recently wrote a scholarly article on this topic in the journal of the Society of Trust and Estate Practitioners (STEP).

Remember that registered accounts include RRSPs (registered retirement savings plan) and RRIFs (registered retirement income fund). These plans all allow you to name a beneficiary to receive the funds on your death.

As well, the RRIF allows you to name a "successor annuitant", which would be a person who would continue to receive the payments you were receiving from the RRIF prior to your passing.

Any such beneficiary designations allow these assets to pass outside of your estate. This means that they avoid probate, but do not necessarily go to the same people you have named in your will.

This just means you want to make sure your wishes are clear and consistent in both documents.

For example, if it was your intention to leave all of your estate to your children, you would name them in your will to receive the residue of your estate. However, if you named your spouse or some other person as beneficiary of your RRSP or RRIF, obviously those assets would go a different direction than the assets that formed part of your estate.

In today's column, we are ignoring tax consequences. Registered assets left to a spouse are not taxed on the death of the first spouse. Registered assets left to any other beneficiary are taxed to the estate in the year of death (except with disabled dependent beneficiaries).

Life insurance policies usually pass by way of beneficiary election, and similar care must be taken in consistency and purpose. However, the death benefits are paid tax-free when left to an individual, so less concern there.

There is a subset of registered accounts known as locked-in plans. These are made up of money that was transferred from a previous pension plan, and are therefore covered by more restrictive rules.

The RRSP equivalent locked-in plan is called a LIRA (locked-in retirement account) or locked-in RRSP, and the RRIF equivalents are called LIF (life income fund) or LRIF (locked-in retirement income fund).

Generally, the spouse or common-law partner must be named as beneficiary on locked-in plans, consistent with pension legislation. Naming a child as beneficiary where a spouse exists will usually be ignored in favour of the spouse. This could happen when a widow or widower names children, and then starts a new spousal relationship and neglects to change the previous beneficiary designation.

Provincial law is variable and tricky on whether or not the spouse can waive rights, and the spouse can always cancel such a waiver.

The spouse is usually first choice from a tax perspective, to avoid the entire registered account value being added to the income of the deceased person in the year of death.

Segregated funds are investment funds issued by insurance companies. Unlike conventional mutual funds, these allow a beneficiary designation, which means the assets bypass the estate, and are protected from creditors of the deceased or the estate.

TFSA accounts allow beneficiary elections, and if a spouse or common law partner (known as a "survivor" in this context) is named as "successor holder", the amount can be added to the survivor's TFSA without affecting contribution room -- an "exempt contribution". A form RC 240 must be filed. Other beneficiaries simply receive the money that was in the TFSA into their own hands (outside their TFSA).

I am going to ask you two favours about your estate planning -- please check this weekend to see whether everything is the way you want it, and get good advice on your plan and your beneficiary designations.

Oh, one more thing, unrelated... please don't overspend on Christmas presents. Arrange to give your time as a substitute.

Priceless.

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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.

Please consult your own tax and financial advisors for specific advice on your individual situation.

David Christianson, BA, CFP, R.F.P., TEP, is a financial planner.

Republished from the Winnipeg Free Press print edition December 7, 2012 B11