Named beneficiaries vs the estate—which is better?
Thanks for writing in, Catherine. A common thing we think about when doing our estate plan is how to make transferring our assets and money to friends and family go smoothly. So, naturally, this brings up the questions: How should you handle your investment accounts? And what makes the most sense for your situation?
First, let’s review the pros and cons of naming beneficiaries in registered accounts versus not naming anyone and having the account flow through to the estate.
Naming beneficiaries on registered accounts
Depending upon the type of registered investment account you hold, Catherine, there may be some planning opportunities for the asset. In every province and territory, except for Quebec, Canadians can name beneficiaries on the registered account. (Note: Under Quebec’s legislation, you can only do so in a will.) The types of accounts that allow for named beneficiaries include registered retirement savings plan (RRSP), registered retirement income fund (RRIF), tax-free savings account (TFSA), registered education savings plan (RESP), and segregated funds. In contrast a non-registered account does not allow for the naming of beneficiaries and therefore the account will go to the estate if there is no surviving joint account holder.
While each type of registered account has rules and stipulations on how many beneficiaries can be named or who can be specifically added as a beneficiary, the pros and cons for naming beneficiaries below can be generalized.
Pros
The biggest pro for naming beneficiaries for a registered investment account would be that the asset would then avoid probate tax. Probate tax is a fee paid when the executor of the estate applies to the court for their certificate of appointment, which grants them the legal authority to administer the estate.
Catherine, this can become costly, depending on which province you live in. In Ontario, for example, the rate is 1.5% calculated on the estate’s assets (after the first $50,000). Whereas in Alberta, the fees are flat-rated based on the estate’s value in a laddered approach (i.e., $10,000 or under is $35). Naming beneficiaries directly on these accounts allows the investment to bypass the probate process and the asset can be sent directly to whomever you’ve named.
Another benefit would be privacy. You can directly name a beneficiary on the registered investment accounts, and no one needs to know. Aside from yourself, the financial institution and the beneficiary, of course. This could be helpful if there was someone you were hoping to leave money to but didn’t want anyone else to be involved.
Cons
You may be thinking, what possible negative outcome could there be in naming beneficiaries in my investment account? It does seem like a bit of a no-brainer; however, there can be some adverse tax consequences you should be aware of, Catherine. While the investment account goes directly to the named beneficiary, income taxes will still need to be paid.
Debbie Stanley
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