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Named beneficiaries vs. estate – which is better?
Thanks for writing Catherine. A common thing we think about when creating our estate plan is how to ensure that the transfer of our wealth and money to friends and family goes smoothly. The question naturally arises: How do you deal with your investment accounts? And what makes the most sense for your situation?
First, let’s look at the pros and cons of naming beneficiaries in registered accounts versus naming no one and allowing the account to flow into the estate.
Designation of Beneficiaries on Registered Accounts
Depending on the type of your registered investment account, Catherine, there may be some planning options for the asset. In all provinces and territories except Quebec, Canadians can designate beneficiaries on the registered account. (Note: Under Quebec law, you can only do this in a will.) Types of accounts that allow named beneficiaries include Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), Tax-Exempt Savings Account (TFSA ). ), Registered Education Savings Plan (RESP) and segregated funds. In contrast, an unregistered account does not permit naming of beneficiaries and therefore the account goes to the estate if there is no surviving joint account holder.
While each type of registered account has rules and regulations on how many beneficiaries can be named or who specifically can be added as a beneficiary, the pros and cons for beneficiary naming can be generalized below.
advantages
The biggest benefit to naming beneficiaries for a registered investment account would be that the asset would then avoid estate tax. Estate tax is a fee paid when the executor applies to the court for a deed of appointment that gives him legal authority to administer the estate.
Catherine, this can get expensive depending on which province you live in. For example, in Ontario the tax rate is 1.5% calculated on the assets of the estate (after the first $50,000). While in Alberta, fees are calculated at a flat rate based on the value of the estate in a tiered approach (i.e. $10,000 or less is $35). By directly naming beneficiaries on these accounts, the investment can bypass the probate process and the asset can be sent directly to the person you nominate.
Another benefit would be privacy. You can name a beneficiary directly on the registered investment accounts without anyone having to know. Apart from you, of course, the financial institution and the beneficiary. This could be helpful if you wanted to leave someone money but didn’t want anyone else involved.
Disadvantages
You may be thinking what possible negative consequences the designation of beneficiaries could have on my investment account? It seems a bit like a no-brainer; However, there may be some adverse tax consequences that you should be aware of, Catherine. While the investment account goes directly to the named beneficiary, income taxes still have to be paid.