1. What Are RRSPs, RRIFs and TFSAs?

2. What Does Alberta Law Say?

3. How RRSPs Are Dealt With After Death

4. How RRIFs Are Dealt With After Death

5. How TFSAs Are Dealt With After Death

6. Understanding Beneficiary Designations

7. Special Rules for Surviving Spouses and Adult Interdependent Partners

8. Tax Consequences Can Be Significant

9. Will Probate Still Be Required?

10. Common Mistakes

11. Costs and Tax Considerations

12. When Should You Speak With an Estate Lawyer?

13. How Can Bridgestone Law Help?

Introduction

Many Albertans spend decades building their retirement savings. Monthly contributions to an RRSP, careful investment decisions inside a TFSA, or income received through a RRIF often represent years of planning and financial discipline.

Yet one important question is frequently overlooked:

What actually happens to these accounts after you die?

RRSPs, RRIFs and TFSAs do not all pass the same way after death.

In many cases:

• a valid beneficiary designation allows the account to pass directly to the named beneficiary;

• the account may bypass the estate for transfer purposes;

• probate may not be required for that particular asset;

• income tax consequences can still arise, particularly with RRSPs and RRIFs;

• different rules often apply where the beneficiary is a surviving spouse or Adult Interdependent Partner.

Because each registered account has different legal and tax rules, beneficiary designations should be reviewed regularly as part of your overall estate plan.

What Are RRSPs, RRIFs and TFSAs?

Although these accounts are all registered investment vehicles, they serve different purposes.

Registered Retirement Savings Plan (RRSP)

An RRSP is designed to help Canadians save for retirement.

Contributions are generally tax deductible, and investment growth is tax deferred while the funds remain inside the plan.

Withdrawals are generally taxable.

Registered Retirement Income Fund (RRIF)

A RRIF is commonly created when an RRSP is converted into retirement income.

Instead of making contributions, the account holder receives minimum annual withdrawals while the remaining investments continue to grow on a tax-deferred basis.

Tax-Free Savings Account (TFSA)

A TFSA allows investments to grow without tax on future earnings.

Unlike RRSPs and RRIFs, withdrawals from a TFSA are generally not taxable.

This difference becomes especially important when planning an estate.

What Does Alberta Law Say?

While Alberta estate legislation governs the administration of estates, registered plans are also governed by federal income tax legislation, the contractual terms of the financial institution, and applicable beneficiary designation legislation.

Whether an RRSP, RRIF or TFSA forms part of an estate often depends on:

• whether a valid beneficiary has been designated;

• whether the beneficiary survives the account holder;

• the wording of the designation;

• whether the designation complies with Alberta law; and

• the type of registered account involved.

It is therefore possible for two estates with similar assets to be administered very differently depending on how these accounts were established.

How RRSPs Are Dealt With After Death

An RRSP can be one of the most valuable assets in an estate, but it can also create one of the largest tax liabilities.

What happens to an RRSP after death depends largely on whether a beneficiary has been designated and who that beneficiary is.

If a Beneficiary Has Been Named

Many RRSPs allow the account holder to name a beneficiary directly through the financial institution.

If the designation is valid, the RRSP may pass directly to that beneficiary rather than becoming part of the estate for transfer purposes.

However, this does not necessarily determine who is responsible for any income tax arising from the RRSP. Depending on the circumstances, the estate may remain responsible for reporting the income and paying the resulting tax, unless specific rollover provisions or other exceptions apply.

If No Beneficiary Has Been Named

If there is no valid beneficiary designation, the RRSP generally becomes part of the deceased's estate.

The executor will collect the funds and distribute them according to the will or, if there is no will, Alberta's intestacy laws.

Because the account now forms part of the estate, it may also be subject to the estate administration process and, where required, probate.

How RRIFs Are Dealt With After Death

A RRIF operates similarly to an RRSP after death, although the owner has already begun receiving retirement income from the account.

Like an RRSP, a RRIF often allows a beneficiary designation.

If a valid beneficiary has been named, the proceeds may pass directly to that individual without first passing through the estate.

If no beneficiary has been designated, the RRIF generally becomes an estate asset and is administered by the executor.

Although RRIFs and RRSPs operate similarly, the available tax treatment and rollover options can differ depending on the circumstances, making professional advice particularly valuable.

How TFSAs Are Dealt With After Death

Tax-Free Savings Accounts are treated differently from RRSPs and RRIFs.

The investments held within a TFSA generally remain tax-free during the account holder's lifetime.

Upon death, the fair market value of the TFSA at the date of death can often be transferred to a properly designated beneficiary.

However, any investment growth occurring after death may no longer receive the same tax-free treatment unless specific rules apply.

This distinction is frequently overlooked during estate planning.

Successor Holder vs. Beneficiary

One unique feature of a TFSA is the ability, in many circumstances, to designate a surviving spouse or Adult Interdependent Partner as a successor holder.

A successor holder effectively steps into the deceased's position as the owner of the TFSA, allowing the account to continue with its tax advantages largely intact.

This differs from simply naming a beneficiary, who generally receives the value of the account but does not continue as the account holder.

Choosing between these options should form part of a broader estate planning discussion.

Understanding Beneficiary Designations

Beneficiary designations are among the most important estate planning tools available for registered accounts.

A properly completed designation can:

• simplify the transfer of assets;

• reduce delays;

• allow assets to pass directly to the intended recipient;

• reduce the amount of property flowing through the estate; and

• in some cases, reduce probate-related administration.

However, beneficiary designations should never be completed and forgotten.

They should be reviewed regularly, particularly after:

• marriage;

• entering an Adult Interdependent Partnership;

• separation or divorce;

• the birth of children or grandchildren;

• the death of a previously named beneficiary;

• significant changes in financial circumstances; or

• preparing a new will.

A beneficiary designation that no longer reflects your wishes can create unintended outcomes that may be difficult or impossible to correct after death.

Special Rules for Surviving Spouses and Adult Interdependent Partners

Canadian income tax legislation contains several provisions that may permit certain registered retirement assets to transfer to a surviving spouse or Adult Interdependent Partner on a tax-deferred basis.

In many cases, this allows the registered funds to continue supporting the surviving spouse's retirement without triggering immediate taxation that might otherwise arise on death.

The availability of these rollover provisions depends on the specific circumstances and applicable tax rules.

Because these rules can significantly affect the value ultimately received by beneficiaries, coordinated legal and accounting advice is often worthwhile when preparing or administering an estate.

Tax Consequences Can Be Significant

One of the most common misconceptions is that a beneficiary who receives an RRSP or RRIF automatically receives the full value tax free.

In reality, RRSPs and RRIFs can trigger substantial income tax consequences on death.

Depending on the circumstances:

• the full value of the RRSP or RRIF may be included in the deceased's final income tax return;

• the estate may become responsible for paying the resulting income tax;

• beneficiaries may receive their inheritance before the tax liability is fully understood if the estate is administered improperly; and

• disputes can arise where beneficiaries of registered accounts are different from the beneficiaries of the estate.

By contrast, TFSAs generally do not create the same income tax consequences with respect to the value accumulated before death, although post-death growth can create separate tax considerations.

Because these rules are highly technical and can involve significant sums of money, executors commonly retain both an estate lawyer and an accountant experienced in estate administration.

Will Probate Still Be Required?

A common misunderstanding is that naming beneficiaries on registered accounts eliminates the need for probate altogether.

That is not necessarily the case.

While an RRSP, RRIF, or TFSA with a valid beneficiary designation may pass outside the estate for transfer purposes, probate may still be required if the deceased owned other assets requiring a Grant of Probate.

Examples include:

• real estate held solely by the deceased;

• investment accounts without designated beneficiaries;

• private corporation shares;

• business interests;

• significant bank accounts; or

• other assets that financial institutions require probate to release.

Probate is determined by the nature of the estate as a whole—not simply by the existence of beneficiary designations on certain accounts.

Practical Examples

Example One: Naming a Spouse as the RRSP Beneficiary

Michael and Susan have been married for over 30 years.

Michael names Susan as the beneficiary of his RRSP. When Michael dies, the RRSP passes directly to Susan, and because she is his surviving spouse, special tax rollover provisions may be available under the Income Tax Act. This allows the retirement savings to continue supporting Susan while potentially deferring the immediate tax consequences that might otherwise arise.

Although the RRSP passes outside of Michael's estate for transfer purposes, his executor must still work with the estate accountant to ensure the final tax returns are prepared correctly.

Example Two: An Adult Child Is the Beneficiary

David is widowed and names his daughter as the beneficiary of his RRIF.

When David dies, the RRIF is paid directly to his daughter.

However, unless a specific tax exception applies, the value of the RRIF may still be included in David's final income tax return. If the estate must pay the tax while the daughter receives the full RRIF proceeds, the beneficiaries under the will may ultimately receive less than expected.

This type of situation can create conflict among beneficiaries if the estate plan has not been carefully coordinated.

Example Three: No Beneficiary Designation

Linda has an RRSP, a TFSA, and several investment accounts but never completed beneficiary designation forms.

Following her death, each registered account becomes part of her estate and is administered by her executor under the terms of her will.

The administration takes longer because the financial institutions require proof of the executor's authority before releasing the funds, and probate is required for the estate due to Linda's other assets.

Had Linda reviewed her beneficiary designations as part of her estate plan, the administration of certain assets may have been more straightforward.

Common Mistakes

Registered accounts often appear simple on the surface, but mistakes involving beneficiary designations and tax planning can significantly affect an estate.

Failing to Name a Beneficiary

Many people assume their will controls every asset they own.

If no beneficiary designation has been completed, that may be true for registered accounts. However, naming an appropriate beneficiary where suitable may simplify the transfer of the account and reduce administrative delays.

Beneficiary designations should always be reviewed as part of a comprehensive estate plan.

Forgetting to Update Beneficiary Designations

A beneficiary designation completed twenty years ago may no longer reflect your current wishes.

Marriage, separation, divorce, the birth of children, or the death of a previously named beneficiary are all events that should prompt a review of your registered accounts.

Reviewing your will but forgetting your beneficiary designations is a surprisingly common oversight.

Assuming Registered Accounts Are Tax-Free After Death

While TFSAs generally receive favorable tax treatment, RRSPs and RRIFs can create significant income tax liabilities upon death.

Without proper planning, the resulting tax may substantially reduce the value of the estate available for beneficiaries.

Assuming Probate Is Never Required

Many Albertans hear that naming beneficiaries avoids probate.

While a beneficiary designation may allow that particular account to pass outside the estate, probate may still be required for other estate assets.

Estate planning should consider the estate as a whole rather than focusing on one type of asset.

Not Coordinating Registered Accounts With the Will

Beneficiary designations and wills should complement one another.

If registered accounts pass to one beneficiary while the estate pays the associated taxes, the overall distribution of the estate may differ significantly from what the deceased intended.

A coordinated estate plan helps reduce the risk of unexpected outcomes and disputes among beneficiaries.

Costs and Tax Considerations

Unlike probate filing fees or legal expenses, the most significant cost associated with registered accounts after death is often income tax.

Depending on the circumstances, the estate may also incur:

• accounting fees for preparing the deceased's final tax returns;

• legal fees for estate administration;

• probate filing fees where probate is required;

• financial institution administration fees;

• investment management fees until the accounts are distributed; and

• professional advice regarding tax rollovers and beneficiary designations.

Because every estate is different, the ultimate tax consequences will depend on factors such as the size of the registered accounts, the identity of the beneficiaries, and whether any tax-deferred rollover provisions are available.

For this reason, executors are often encouraged to retain an accountant experienced in estate taxation before making distributions to beneficiaries.

When Should You Speak With an Estate Lawyer?

Legal advice may be particularly valuable if:

• you have substantial RRSP, RRIF, or TFSA assets;

• you have a blended family;

• you wish to leave registered accounts to someone other than your spouse;

• you own a business or corporation;

• your beneficiaries live outside Canada;

• you have concerns about estate taxes;

• you are updating your will after marriage, separation, or divorce;

• your estate includes multiple beneficiary designations; or

• you are acting as an executor and are uncertain how registered accounts should be administered.

Estate planning involving registered accounts often requires careful coordination between legal advice and tax planning to ensure your wishes are carried out as intended.

How Bridgestone Law Can Help

Registered accounts are an important part of many Albertans' financial lives, but they should never be considered in isolation. Beneficiary designations, wills, tax planning, and the administration of an estate all work together.

Bridgestone Law assists individuals and families throughout Calgary and Alberta with wills, estate planning, probate, and estate administration. We can help review your beneficiary designations, coordinate your estate planning documents, advise executors on their responsibilities, and work alongside your accountant or financial advisor to help ensure your estate is administered efficiently and in accordance with Alberta law.