Learn the options for inheriting a RRIF

Ever wondered what the difference is between a ‘successor annuitant’ and a named ‘beneficiary designation’ when transferring from a Registered Retirement Savings Plan to a Registered Retirement Income Fund? Probably not, but the distinction is important.

A RRSP (Registered Retirement Savings Plan) is a tax deferred savings plan to save for your retirement. At age 71, RRSPs must be transferred to a RRIF (Registered Retirement Income Fund) with a minimum mandatory income payout each year.

At the time of setting up the RRIF, you may select on the application form or in your will to have your spouse or common law partner named a successor annuitant or a named beneficiary of your RRIF. In the event your spouse predeceases you, don’t forget to elect a beneficiary or a contingent beneficiary to receive the proceeds of your RRIF.

Imagine the following… Barney and Betty have been married since 1976. Together they have purchased a home, contributed to their RRSPs and spousal RRSPs, paid into company pension plans, raised one child and finally retired in 2007. During retirement, the grandchildren have come to live with Barney and Betty and are fully supported by them. This year they will have to transfer their RRSPs and spousal RRSPs to RRIFs. They are both concerned – what is the best option for them successor annuitant or named beneficiary.

Again Barney and Betty imagine. In their imagination, Barney has been deceased for three months. What is the situation if they had elected successor annuitant?

• Betty continues to receive income from her pension, CPP (Canada Pension Plan), OAS (Old Age Security) and her RRIF.

•Since she and Barney owned their home jointly, there is no change.

• She has applied to receive the spousal benefits from Barney’s CPP and company pension but is still waiting to receive them.

• Since Barney selected Betty as successor annuitant for their RRIFs, Betty has informed the applicable financial institution and provided them with a death certificate. Betty is now the owner of Barney’s RRIF and the income continues to Betty uninterrupted.

• Any income from Barney’s RRIF, up to the point of his death, is reported on his terminal tax return (a.k.a. final tax return).

• Even more importantly, the FMV (Fair Market Value) of Barney’s RRIF is not reported as income for income tax purposes.

• Further, if Betty was under age 71, she could have transferred Barney’s RRIF to her RRSP.

Once more they imagine the future. This time both Barney and Betty are deceased. Betty opted for a named beneficiary for her RRIFs. Her beneficiary is her Estate.

• Betty has named qualified beneficiaries, a child or grandchild who is financially dependent on the deceased, in her will to receive the RRIF proceeds. The grandchildren are under the age of 18 and their net income is under the basic personal amount of $10,382 (2010).
Note: if the named beneficiary was infirm, financially dependent and qualified for the disability amount, the net income to qualify as dependent would increase to $17,621 (2010).

• Since the grandchildren are under the age of 18, Betty has directed in her will the RRIF be used to purchase annuity (monthly income) until they are age 18 and a lump sum to be invested for the grandchildren’s education over age 18.

• The lump sum amount invested for the grandchildren will be taxed on the children’s tax return in the year of Betty’s death.

• The annuity (monthly income) has the tax advantage of being taxable in the year of receipt, thereby spreading the tax over a period of years until the grandchildren are age 18.

• In the event Betty did not have any qualified beneficiaries, the full FMV (Fair Market Value) of her RRIF would be reported on Betty’s terminal tax return (a.k.a. final tax return) and any income earned between the date of death and the winding up of her RRIF would be taxable to her Estate.

• And, if Betty had remarried… and then named her new spouse, Fred, beneficiary of her RRIF, (instead of successor annuitant), Fred would have the option of transferring the full amount of Betty’s RRIF to his own RRIF, (or a RRSP if he is under age 71).

• With the rollover of Betty’s RRIF to Fred’s RRIF, there is no immediate taxation of the RRIF however the FMV (Fair Market Value), the full amount of the RRIF, must be reported on Betty’s terminal tax return. A deduction is available for a designated benefit paid to a survivor to offset any tax in Betty’s estate.

Under the named beneficiary option, some unique tax planning strategies are available to provide tax relief for Fred. These same strategies can be used reduce tax in Betty’s estate, such as applying any of Betty’s remaining net capital losses to income. A tax professional will be able to assist with these opportunities.

J McPherson, CFP, CLU, TEP, provides consultations to individuals in planning their financial lifestyles.
416-738-1555


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