Beneficiary Designations & Your Estate Plan

If you have RRSPs, a pension or life insurance, you have probably thought about the best way to set up beneficiary designations.  One of the big questions people often have is whether to designate a person or their estate as beneficiary.  The answer to this question depends upon how you ultimately want your estate to be set up and what will be most beneficial to the people you care about.

Reasons to designate your estate as beneficiary include:

  • You have minor children who you want to designate as beneficiaries
  • You have adult children who require assistance managing their finances
  • Your estate will require an influx of money to meet income tax obligations or to pay for cash gifts in the Will or to establish capital for a trust created by your Will

An advantage of naming your estate as beneficiary when you have minor children is that you control how a trust in your Will operates.  Where there is a large sum potentially going to young children, you may want them to inherit at 25 rather than at 18.  Similarly, you may want to establish a trust during a person’s lifetime where that person requires assistance managing money or to avoid negative impacts on any social assistance payments being received.

Another advantage of having your estate as beneficiary is you may provide for grandchildren to receive a share where one of your children predeceases you. For instance, you and one of your adult children are both killed in a car accident. The beneficiaries on your RRSP are your two adult children. Only your surviving child will receive the proceeds of the RRSP.  If your estate had been the beneficiary and your Will provided that grandchildren inherit a deceased parent’s share, your deceased child’s children would receive half of the RRSP proceeds.

You should give special consideration to beneficiary designations for RRSPs/RRIFs because income tax automatically becomes payable on these investments on your death.  These taxes may be deferred if your RRSPs go to your spouse using a spousal tax rollover.  If you are leaving your RRSPs to someone other than your spouse, you should think about naming your estate as beneficiary.

Something else to consider is that your estate, not the RRSP beneficiary, is responsible for related income taxes which may be problematic in certain circumstances.  For example, you leave your RRSPs to one child as being half of your assets and gift the other half of your assets to your other child in your Will. The child who receives the gift in you Will may receive quite a bit less than you anticipated after all expenses and taxes are paid out of the estate.

Because your estate is responsible for paying legal debts, income taxes and any expenses related to your estate like probate fees, you may want to name your estate as beneficiary to ensure there will be sufficient liquid assets to meet your estate’s obligations and avoid your estate having to sell valuable items such as heirlooms or collectibles with sentimental value.

One disadvantage of naming your estate as beneficiary is that probate fees may be payable on the proceeds of your life insurance, RRSPs/RRIFs, or pension.  The probate fees in Saskatchewan are presently .7% of the value of the estate or $7 on every $1,000.

The above post is only a general summary regarding how to best set up beneficiary designations. Contact our office today to set up an appointment for legal advice tailored to your overall estate plan.