If the RRIF is not set up this way, there will be immediate tax consequences, and the estate wishes of your husband may not play out as intended.
What happens if you’re not named the beneficiary or successor owner of a RRIF
When a partner dies, the full amount of their RRIF will be added to their other income for the year and taxed at the current rate. For example, Shearer, if your husband is in Ontario and has an annual taxable income of $50,000, he would pay about $5,800 in tax, based on his marginal tax rate.
If were to die on December 31 of this year, with $300,000 in his RRIF, his total taxable income will be $350,000. And his estate would pay about $148,000 in tax, again based on his marginal tax rate. An increase of approximately $142,000, almost 50% of the value of his RRIF.
If no beneficiary or successor owner is named within the will nor RRIF documents, the RRIF proceeds will pass through the estate and will be subject to estate administration tax. If there’s a beneficiary who’s not a qualifying survivor, which I will explain later, the RRIF proceeds will pass to them tax-free, and the estate will pay the tax.
To help yourself understand that, think about what would happen if your husband has children from a first marriage. Using the $300,000 RRIF example above, the children would receive its proceeds tax-free, and your husband’s estate, possibly you, must come up with the money to pay the tax. If this is your husband’s second marriage (or yours), or either of you want to divide your assets unequally amongst your beneficiaries, make sure you understand the tax consequences you are putting on the estate and your surviving partner.
How to reduce or eliminate the tax consequences on the death of a RRIF holder
You can reduce or eliminate the tax on income from a RRIF upon your death by leaving it to a qualifying survivor. A qualifying survivor can be a:
Spouse or common-law partner
Financially dependent infirm child or grandchild
Financially dependent child or grandchild
The first one is you, Shearer. So, you’re not going to pay tax on the RRIF, if your husband passes and you succeed him. You become the owner of his RRIF or the money goes into your RRSP or RRIF.
Should you be named a beneficiary or successor owner on a RRIF?
Canadians can name a spouse as either the beneficiary or successor owner of their RRIF. As a beneficiary, Shearer, you have the choice of either paying out the RRIF to your registered retirement savings plan (RRSP) and/or RRIF or taking the cash. If you take the cash or investments in kind, the RRIF value will be included with your husband’s other income for the year, as described above.
“Should I talk to my husband about this?” (Photo subjects are models.) – Getty Images/iStockphoto
Dear Quentin,
My husband and I are both on our second marriage. We each have children from previous marriages. His divorce decree from his first wife states that he must maintain a $350,000 life-insurance policy for his children. However, on the actual policy, I am the sole beneficiary. What would happen if he dies and I receive the payout from the life-insurance policy?
Am I legally obligated to turn the money over to his children because of what his divorce decree says? There is no written will at this time indicating anything for his children. I don’t want to be left in legal limbo. Should I talk to my husband about this and have him name his children as beneficiaries on the policy, consistent with his divorce decree?
You may wish to ask your husband to take your name off the policy and make his children the beneficiaries, in accordance with his divorce decree. – MarketWatch illustration
Dear Stepmother,
You wouldn’t be the first second wife to be part of a face-off between a life-insurance policy and a divorce decree.
It’s smart and mature to be forward-thinking and to want to sort this out now, rather than kicking the can down the road and waiting for something to happen to your husband, and only then seeing how it all plays out. That would not only create legal problems for you and his first wife, it would also create unnecessary stress for the entire blended family at an extremely difficult time. I applaud you for wanting to do the right thing and making sure nothing nefarious happens. It’s the decent thing to do. The Supreme Court has also weighed in on such cases.
You may wish to ask your husband to take your name off the policy and make his children the beneficiaries, in accordance with his divorce decree. “If you are ordered to pay spousal support and/or child support in your divorce settlement, the judge may require you to maintain life insurance to protect these payments,” according to Charles R. Ullman & Associates, attorneys at law in Raleigh, N.C. “Once your children reach the age of majority, you may file a motion to have the divorce agreement amended.”
“Some life-insurance policies are established with irrevocable beneficiaries, which cannot be changed by the policyholder alone,” the law firm adds. “Unless an ex-spouse agrees to changes in the policy, as an irrevocable beneficiary, he or she would have the right to a payout upon your death even after a divorce.” If there were no children involved and your husband was not ordered to maintain the life-insurance policy as part of his spousal support, he could in good conscience put your name on the policy as a beneficiary, it adds.
This may all be moot depending on the type of policy he has. A term-life policy lasts anywhere from 10 to 30 years, and if your husband lived longer than that, the policy would expire and the beneficiaries would not receive any money. A whole-life policy, on the other hand, has a cash value (the amount you can take out while you are alive) costs more than a term-life policy. Once a whole-life policy has built up significant monetary value, the insured person can cash it out or borrow against it. And, yes, if the insured person dies, the face value would go to the legal beneficiary.
A caveat: If your husband’s divorce decree was not clear regarding the beneficiary of his life-insurance policy, the outcome may depend on the laws of your state. A divorce decree can sometimes override a life-insurance policy, but the circumstances are quite limited: “If the policyholder was married in a community property state and got divorced, the ex-spouse may be entitled to some of the death benefit regardless of who is the named beneficiary,” according to Boonswang Law in Philadelphia.
It’s not clear whether your husband acted to change the beneficiary on his life-insurance policy knowing it would contravene his earlier divorce decree. Roughly half of U.S. states — including Florida, Pennsylvania, New Jersey, New York, Texas, Massachusetts and Colorado — have some form of revocation-upon-divorce statute that automatically removes an ex-spouse as a life-insurance beneficiary after divorce, the law firm says. California law, on the other hand, excludes life-insurance policies from automatic revocation-upon-divorce laws.
In a similar but not identical case, the Supreme Court decision ruled in favor of the ex-wife. In Hillman vs. Maretta, the Supreme Court ruled in favor of a 66-year-old man’s ex-wife, who was named as the beneficiary of a life-insurance policy worth over $124,000, rather than his widow. The second wife asserted that she could claim the policy under Virginia state law, which revokes a divorced spouse’s beneficiary in favor of the widow or widower. The Supreme Court disagreed, and the ex-wife got the money.
Ask your husband to address this inconsistency and become his own Supreme Court justice.
RESP contributions grow tax-deferred and are eligible for government grants and bonds. Withdrawals are partially taxable and partially tax-free. The taxable portion can be taxed to the post-secondary student, who may pay little to no tax on the income.
Should you give your children money to contribute to an RESP?
Some grandparents choose to contribute by giving money to their children for their grandchildren’s RESP. This can be preferable—for example, if the grandparent wishes to benefit their grandchildren without being responsible for managing the account. This approach can also help families avoid the risk of overcontributing to the account (there is a $50,000 lifetime limit per beneficiary) or making contributions that do not qualify for government grants (typically $2,500 in contributions for the current year, and up to $2,500 for a previously missed year, are eligible).
In your case, Bill, there can be complexities if the RESP makes up part of your estate. Your grandchildren could still be attending post-secondary school in 15 years, and you would be in your 90s. Hopefully, you will be there to see them graduate. But as you allude to, you never know.
Joint RESP accounts
You mention that you have a joint RESP. I think what you mean is that you have a family RESP that is for both grandchildren. I like this approach as it allows for more flexibility for siblings. The account can be used for either child in different increments. One may have more expensive schooling than the other, or one may not pursue post-secondary education at all.
Some providers allow you to open a joint RESP account, meaning one that has two subscribers. (A subscriber is someone who opens an RESP on behalf of a beneficiary.) This can be convenient for administrative purposes, but also from an estate planning perspective. Typically, only spouses or common-law spouses—including former spouses—can be joint subscribers, though.
Naming a successor subscriber
Depending on the financial institution, you may be able to name a successor subscriber for an RESP account. This person takes over the account if the original subscriber passes away. You should check, Bill, to see if you can name a successor subscriber for your grandchildren’s RESP account. This option is not available to Quebec residents.
If not, the RESP account could become part of your estate, and you may have to pay probate fees as well as income tax on the growth of the contributions. You may also have to repay the government grants and bonds.
Even if you cannot name a successor subscriber at the financial institution where the RESP is held, you may be able to do so in your will. The account could then be transferred by your estate to your child, who would continue to manage the account for your grandchildren.
The U.S. imposes estate taxes on the worldwide estates of its citizens and residents. However, as a Canadian with no U.S. assets, you might initially assume that U.S. estate taxes do not apply to you. The catch here is that since your daughter is a U.S. permanent resident, her inheritance from your estate may generally not be taxable in the United States; however, there may be other tax and filing considerations to keep in mind. Let’s explore them together, Gail.
U.S. estate tax thresholds and exemptions
Currently, the U.S. federal estate tax exemption is quite high, sitting at $13.61 million per individual as of 2024. (All figures are in U.S. dollars.) This means that estates valued below this threshold are not subject to federal estate taxes. Assuming that your estate’s value is under $13.61 million, no federal estate tax would be due. For instance, if your Canadian estate is valued at $3 million, it is well below the $13.61-million U.S. federal estate tax exemption. Therefore, your daughter would not be liable for U.S. federal estate taxes on her inheritance.
State estate taxes
While the federal estate tax exemption is high, it’s important to consider that some U.S. states impose their own estate or inheritance taxes with lower exemption thresholds. The impact of these state taxes depends on where your daughter resides. As of 2024, the states of Washington, Oregon, Minnesota, Illinois, Maryland, Vermont, Connecticut, New York, Rhode Island, Massachusetts, Maine, Hawaii and the District of Columbia impose estate taxes. This means residents of these states might face both federal and state estate taxes, depending on the total value of the assets.
Estate tax thresholds in these states range from $1 million in Oregon to $13.61 million in Connecticut, and tax rates vary. I would recommend that your daughter check her state’s website for specific details on potential estate taxes, Gail.
Financial management and currency exchange
Managing a cross-border inheritance often means dealing with multiple currencies. When preparing your estate plan, Gail, you will want to keep in mind some key points that your future executor will come across when distributing your estate to your daughter:
Currency exchange rates: Fluctuations in exchange rates can affect the value of the inheritance when converting from Canadian to U.S. dollars. For instance, if the Canadian dollar weakens against the U.S. dollar between the time of inheritance and the time of transfer, the value of the inheritance in U.S. dollars could decrease.
Banking and investments: Transferring funds and managing investments across borders may incur extra fees and require dealing with different financial institutions. For example, transferring funds from a Canadian brokerage account to a U.S. account might involve transaction fees, wire fees and foreign exchange fees.
Cross-border legal challenges
Handling a will with cross-border implications requires careful legal navigation. Key issues include:
Recognition of wills:Canadian wills are generally recognized in the U.S., but differences in probate laws can complicate the process. Legal advice in both countries is often necessary. For instance, if a beneficiary wants to sell an inherited Canadian property, they may need to follow both Canadian and U.S. legal procedures.
Asset transfer: Transferring assets like real estate or investments across borders may involve additional legal and regulatory steps. For example, transferring a Canadian investment account to a U.S. beneficiary might require navigating both Canadian banking regulations and U.S. tax reporting requirements.
Practical steps for cross-border estate planning
To ensure a smooth transfer of your estate to your U.S. resident daughter, Gail, consider the following practical steps:
Consult with experts: Engage with a cross-border estate planning specialist who understands both Canadian and U.S. tax laws. These professionals have the expertise needed to navigate the complex rules and regulations involved in cross-border inheritances. They can help ensure that your estate plan minimizes taxes, avoids legal pitfalls, and complies with the laws in both countries, making the transfer of your assets as smooth as possible.
Update your will: Make sure your will is current and clearly outlines your wishes. Specify exactly how you want your assets to be distributed, and think about any cross-border issues that might come up. This will help ensure that everything goes according to your plans when the time comes.
Consider trusts: Establishing a trust can be a smart way to manage and transfer your assets. A trust is a legal arrangement where a trustee holds and manages your assets for the benefit of your chosen beneficiaries. By setting up a trust, you can ensure that your estate is managed efficiently, tax-effectively and according to your precise wishes. Consulting with a cross-border estate planning specialist can help you determine the best trust structure for your situation.
Stay informed: Tax laws and regulations can change frequently, impacting how your estate is taxed and managed. To maintain the effectiveness of your estate plan, schedule regular reviews with a cross-border estate planning specialist. This proactive approach ensures that your plan remains up-to-date, legally compliant and optimized for tax efficiency, ultimately protecting your legacy and providing peace of mind.
How to ensure a smooth transfer of your estate
As you can see, Gail, cross-border estate planning for Canadian parents with U.S. resident children involves navigating complex tax regulations and potential pitfalls. While your estate may be valued under the federal threshold and might not face U.S. federal estate taxes, there are state taxes and other considerations that could impact its final value. By consulting with experts, updating your will, considering trusts and staying informed, you can ensure a smooth and tax-efficient transfer of your estate to your daughter.
Capital gains tax, Nazim, might apply to some of your assets. If you own non-registered stocks or a rental property, for example, they might be subject to a capital gain on your death. Your home would likely be sheltered by the principal residence exemption. A tax-free savings account (TFSA) is tax free, whereas a registered retirement savings plan (RRSP) is not subject to capital gains tax, but is subject to regular income tax. Your RRSP, unless left to a spouse, is generally fully taxable on top of your other income in the year of your death.
The tax is payable by your estate, so although it reduces the inheritance left to your beneficiaries, it’s not payable directly by them. It can be paid with the assets that make up your estate.
Hard versus soft assets
You mention that your estate is made up of hard and soft assets, Nazim. I assume by hard assets you mean real estate. And by soft assets you mean cash, stocks, bonds, mutual funds and/or exchange-traded funds (ETFs).
Your soft assets can be very liquid and used to pay the tax that your estate owes. That tax is not due until April 30 of the year following when your executor files your final tax return. If you die between November 1 and December 31, there is an extension to six months after your death for your executor to file your tax return and pay the tax owing. So, there’s always at least six months to come up with the funds required to pay income tax on death, and there’s more than six months when a death occurs between January 1 and October 31.
Since soft assets are considered sold upon death, there is generally no advantage for your beneficiaries to keep those assets rather than turn them into cash or into other investments of their choosing.
Your hard assets, Nazim, are obviously less liquid. If there is a special property, like a family cottage or a rental property, they choose to keep, I can appreciate how you might want to make sure they can do that without being forced to sell.
Should you buy insurance to cover tax owed upon death?
Your cash and investments may provide sufficient funds to pay taxes owed upon death. Or your beneficiaries may choose to sell one or more of your real estate properties. You could buy life insurance to pay the tax, but I find this strategy is oversold or misunderstood. I will explain with an example.
Let’s say you are 62 years old, and your life expectancy is another 25 years, based on your current health. If you buy a life insurance policy that requires a level premium of $5,000 per year for life, and you pay that premium for 25 years, you will have paid $125,000 to the insurance company. If you instead invested the same amount each year at a 4% after-tax rate of return, you would have accumulated $216,559 after 25 years.
The Income Tax Act does not specifically define a bare trust, Chander. The Canada Revenue Agency (CRA) says: “A bare trust for income tax purposes is a trust arrangement under which the trustee can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust’s property.”
Essentially, a bare trust may exist when someone holds legal title to an asset, but some or all of the asset technically belongs—meaning it beneficially belongs—to someone else. Unlike formal trusts that are generally established with a lawyer, a bare trust is informal and can result simply from adding someone’s name to an account or to the ownership of a real estate property.
Common bare trust situations
Some common examples of bare trusts are:
a parent co-signing a mortgage for their child and going on the title
a parent or grandparent who has an account for a minor child or grandchild
an adult child with joint ownership of their parent’s bank account, investments or real estate for estate planning purposes
Who has to file a trust tax return?
The trustees of the trust need to file a tax return for it. The trustees are the people who own the assets on behalf of others. So, in the case of a parent co-signing a mortgage, it is the parent who needs to file. In the case of an account for a minor child or grandchild, it is the parent or grandparent who owns the account. In the case of an adult child who holds assets jointly with their elderly parent, it is the child who needs to file.
Only trusts with assets of $50,000 or more are required to file.
Required tax filings
Bare trusts are required to file T3 Trust Income Tax and Information Returns for the 2023 tax year. A bare trust may not need to submit as much information as other trusts. The CRA has provided this guidance (see section 3.3) to Canadians:
Step 1: Identification and other information
When using our online services, identify the type of trust as Bare Trust by selecting “code 307, Bare Trust” and provide the trust creation date in the appropriate field.
If this is the first year of filing a trust return, send us a copy of the trust document, unless such information or document has been previously submitted. See 5.3 for more information on what documents may be required.
Where applicable, provide a response and information related to whether the trust is filing its final return (and if so, provide the date on which the trust has been terminated or wound up in the year).Provide a response and information related to applicable questions on page two.
Step 5: Summary of tax and credits
Complete the last page including the parts “Name and address of person or company who prepared this return” and “Certification.”
For bare trusts, the remaining parts of the T3 Return can be left blank. All income from the trust property for a taxation year should be reported on the beneficial owner’s return of income.
A trust must have a name so it can be identified by the CRA. The CRA gives this example: For a bare trust for which “Ms. Andrews” is the beneficiary, a name like “Ms. Andrews trust” may be appropriate. If there are multiple beneficiaries, the CRA suggests putting the names in alphabetical order based on last name, with the word “trust” at the end.
How to get a CRA trust number
A trust also needs a trust number. This number is similar to a social insurance number in that it helps the CRA identify the taxpayer—which in this case is the trust.
First, it bears mentioning that wills typically provide discretion to the trustees to sell, call in or convert into cash any part of an estate in their absolute discretion. The trustees may also have the ability to postpone a sale if they think it’s best. For example, that could be the case if market conditions made it inadvisable to immediately sell a real estate property, business assets or investments.
An estate trustee typically has the discretion to distribute specific assets to beneficiaries as part of their share of an estate. In other words, if one beneficiary wanted a real estate property, they may elect to receive a smaller share of the rest of the estate, like cash proceeds from bank accounts or from selling other assets. If the real estate value was more than their share of the estate, they may be able to buy the asset from the estate, paying the incremental amount over and above the value of their share.
It sounds like your parents’ estate has already been distributed to you, though, if your own names are now on these properties and accounts. As such, you should have free rein to do as you wish.
Should you hold on to assets jointly or sell them?
In my experience, it’s more common to sell all the assets and distribute the cash that remains (after paying taxes and estate costs) to the beneficiaries. So, your parents’ wishes may not have been so literal as to continue to hold all of their assets jointly.
Real estate could be distributed to multiple beneficiaries directly rather than sold if the property holds sentimental value, such as a family cottage or farm. This would be less likely with estates like your parents’, which includes five properties, at least a few of which are presumably rental properties.
There’s no tax advantage to continuing to hold the properties or the accounts, either. For a couple, tax is payable on the second death.
Should you hold property as joints tenants or tenants in common?
If you and your siblings want to continue to hold the real estate as investments, Lisa, you could do so jointly. You could own the properties as joint tenants with the right of survivorship, in which case the surviving two siblings would inherit the property upon the first death. This would be uncommon for siblings, though.
You could alternatively own the properties as joint tenants in common, which would give you control of the asset even upon your death. You could then leave your share to your spouse or children, for example. This is usually preferred to leaving your assets to your siblings, but perhaps none of you have spouses or children. Even if you do not now, you might in the future.
