Couples have the ability to name each other the beneficiary on their Registered Retirement Savings Plans (RRSP) and Registered Retirement Income Funds (RRIF). One of the main benefits of this is on the first passing, the RRSP or RRIF can be rolled into the surviving spouse’s registered account on a tax deferred basis.
For singles and surviving spouses, planning your estate to avoid a large tax bill becomes more challenging. Naming the beneficiaries of your RRSP and RRIF accounts should involve some strategy and should be integrated into your overall estate plan.
If you have charitable intentions, then your RRSP and RRIF accounts can be a source of funds for this purpose. One way to not pay the government nearly half of your registered account on the second passing is to gift your RRSP or RRIF to charity.
I have outlined two different methods of using your registered accounts for charitable giving – and both are tax effective.
■ Mrs. Wilson is a recent widow and is in the process of updating her legal documents and investment accounts. She has two children and has significant charitable donation intentions. She has a projected estate valued at $1.5 million. This figure is based on her personal residence being valued at $800,000, and the projected value of her non-registered investments at $400,000, and RRIF account $300,000. When her husband died she received his RRIF plan assets on a tax deferred basis and this is currently valued at $600,000.
With the assumption that Mrs. Wilson lives to age 90, we have projected that the value of her RRIF will be $300,000 and will represent the largest tax liability in her estate. In addition to wanting to leave the majority of her estate to her two children, she would like to leave a specified amount of $300,000 to charity, and the balance to be split equally between her two children.
Through the updated estate plan and our discussions, it was advised that Mrs. Wilson name her “estate” the beneficiary of her RRIF account. Naming Mrs. Wilson’s estate ensures that all of her assets are in a single account and get distributed according to the wishes outlined in her Will.
The advantage of this method is that Mrs. Wilson could leave donations to multiple charities at the specific dollar amount she wanted.
Mrs. Wilson also has non-registered investments with significant unrealized capital gains that she would also like to use as part of the funding of the specific dollar amount.
The benefit of charitable donations of investments in-kind is that the capital gain is not taxed and Mrs. Wilson would get the full market value of the investments as a donation tax credit. In the year of death, capital losses may be converted to non-capital to offset against all sources of income, including RRIF income. One disadvantage we saw of Mrs. Wilson naming her estate as the beneficiary of her RRIF is that this method inflates the value of Mrs. Wilson’s estate, which may increase executor and probate fees.
Typically, a bequest through the Will takes longer to be distributed to Mrs. Wilson’s chosen charities than the direct designation method of naming a charity the beneficiary (see Mr. Baker below). The benefits of naming the estate outweighed the additional costs (i.e. probate, executor) and potential time delays.
In reviewing the calculations for Mrs. Wilson, the advice provided was for her to name her estate the beneficiary of her RRIF account. Mrs. Wilson’s estate plan first involved the transfer of investments in-kind from her non-registered investments (with capital gains) directly to charity. If this is insufficient then additional capital can be used from the estate. Any net unrealized capital losses will convert to non-capital on death to reduce taxes on the deemed disposition of her RRIF. Mrs.Wilson can also accomplish her goal of leaving a specific dollar amount, versus the balance of a RRIF account.
■ Mr. Baker has been a life long bachelor and has no children. He has accumulated a significant nest egg in his RRSP at age 70. A couple years ago he talked with a large charitable foundation and has made plans regarding his current financial and estate plans. In reviewing both plans, it was recommended that he directly designate the charitable Foundation as the beneficiary of his RRSP. A direct designation gift of an RRSP or RRIF plan is done by naming one or more charities as beneficiaries on the plan’s documents. With this method assets will bypass Mr. Baker’s estate and will be paid directly to his named charity. The assets do not form part of Mr. Baker’s estate and, thus, avoids probate. In addition, a direct designation will help preserve privacy which is important for Mr. Baker.
Mr. Baker receives significant income from other sources. He does not require the capital in his RRSP to live off today, or in the future. Mr. Baker’s plan involves him contributing to the charitable Foundation throughout his lifetime to obtain the maximum tax benefit. He is executing the plan by initially doing small lump sum contributions to offset his taxable income in the current year. In addition, he has mapped out a plan to contribute in-kind donations of investments from his non-registered account. The investments selected are those that are in a significant unrealized capital gain position – to be donated to the Foundation over time. The donation of securities in-kind means that Mr. Baker does not pay tax on the capital gains and the full market value of the investments are eligible for the donation tax credit. Periodically he plans to contribute securities in-kind that have unrealized capital gains to the Foundation in-kind to offset income each year. When Mr. Baker is 71 he will have to convert his RRSP to a RRIF and then begin taking minimum payments when he is 72. Mr. Baker would like to offset this additional income with annual donations to the Foundation to be at least the amount of his scheduled RRIF payment.
In addition to planned donations while Mr. Baker is alive, he also plans a gift of his RRSP/RRIF plan assets to the Foundation upon his death. This would generate a tax credit at least equal to the tax owing on the registered accounts at the time of his death. Donations can be claimed against 100 per cent of net income in the year of death. If the donation is too large to claim in the year of death, it is possible to carry back donations to claim against 100 per cent of net income in the preceding year. The 100 per cent contribution limit can eliminate all tax in the final two years if the gift is large relative to income. With proper planning, and early contributions, Mr. Baker should be able to obtain the full tax benefit of his donations to the Foundation. By taking full advantage of tax rules, the Foundation will receive a greater portion of Mr. Baker’s net worth.
Only consider a direct designation gift of RRSP/RRIF assets in the context of an overall estate review. For Mr. Baker, it was fairly straight forward as he had no children and he wanted to leave all of his assets to one Foundation. Naming a charity the beneficiary of your RRSP/RRIF should only be done after completing an estate plan and obtaining professional advice.