The first article in this two-part series explored three options for transferring a registered retirement savings plan (RRSP) at death to help reduce the tax impact for clients. In our second article, we look at a fourth option and address registered retirement income fund (RRIF) transfers at death.
OPTION 4: TRANSFER TO A FINANCIALLY DEPENDENT ADULT CHILD WITH A PHYSICAL OR MENTAL INFIRMITY
If a client dies while an adult child or grandchild is financially dependent on them because of a physical or mental infirmity, it’s possible to reduce the deceased’s tax bill by transferring the proceeds of a registered plan to that dependent. The transferred amount is deducted from the deceased’s income and included in the child’s or grandchild’s income. The child or grandchild can then deduct the transferred amount from their income if they, in turn, transfer the money into their own RRSP, RRIF or eligible annuity.
An eligible annuity is a fixed or life annuity with or without a guarantee period, and with the child or grandchild as the annuitant. The term for the guarantee period can be any number of years not exceeding 90, minus the annuitant’s age when the annuity is issued. The term for the fixed annuity must be for a number of years equal to 90 minus the annuitant’s age when the annuity is issued.
An adult child who doesn’t have a physical or mental infirmity but was financially dependent on the deceased may also receive a refund of premiums. However, there’s no way for the child to defer taxes: they’ll be taxed on the total value of the RRSP. This is generally a worthwhile strategy as the financially dependent child won’t necessarily have much income, so their tax rate may be lower than the deceased’s.
AND WHAT ABOUT RRIFS?
Similar to RRSPs, a person is deemed to have received an amount equal to the fair market value of their RRIF immediately before their death. If the deceased’s spouse isn’t the successor annuitant, or if the dependent children or grandchildren are the heirs, the rules described for RRSPs also apply to RRIFs, with some minor differences. For example, instead of qualifying as a ‘refund of premiums’, funds from a RRIF are referred to as the ‘designated benefit’.
Unlike RRSPs, a spouse or common-law partner can be a successor annuitant of a RRIF. When the RRIF owner dies, the successor annuitant assumes ownership of the deceased’s RRIF. Payments continue to the successor annuitant without interruption. However, if the spouse or common-law partner was named as a beneficiary, the same process used for RRSPs would apply. The RRIF money would be treated as income to the deceased, but could be deducted if transferred to the surviving spouse or partner, who would have to include the money in income unless they transferred the money to their own RRSP or RRIF. If the couple intends for the RRIF income to continue to the survivor, naming that spouse or partner as a successor annuitant provides a cleaner transfer than naming the surviving spouse or partner as beneficiary.
INVESTMENT VALUE FLUCTUATIONS IN AN RRSP OR RRIF
Sometimes, weeks or even months go by between the time of death and the distribution of property. During that time, the value of investments in the deceased’s RRSP or RRIF is likely to fluctuate. In some cases, if the value decreases, the loss may be deducted on the deceased’s tax return. If the value of the RRSP or RRIF increases, the difference will be taxable income for the estate or beneficiary of the RRSP or RRIF.
YOUR STRATEGIC ADVANTAGE
When a client dies, the tax implications related to RRSPs and RRIFs can be challenging. You could become the go-to person for family members who have financial questions. The more you know about tax measures that are favourable to heirs, the better you can support them. Just remember that one size doesn’t fit all — clients have different realities and financial needs — and estate planning isn’t just about minimizing taxes. It facilitates the transfer of a person’s wealth the way they want, to the people they want.
ESTATE PLANNING RESOURCES
Sun Life’s estate planning tools include a new Estate maximization whiteboard video, which presents a strategy using life insurance to help maximize an estate. Share it with clients — they might be surprised at the options available and the control they could have!
To learn more about estate planning solutions, talk with your Sun Life Sales Director.