TAX-FREE ESTATE PLANNING
Most of us know about the importance of designating qualified beneficiaries for our Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs). But what about your Tax-Free Savings Account (TFSA)? You can – and should – take steps to protect those assets in much the same way as your other registered plans.
The first thing to note is that the value of the TFSA at death is paid out, tax-free, no matter who receives it: your spouse, your child, a friend, your estate. But there are additional steps you can take to safeguard more of your plan’s assets.
Name your spouse as successor holder. When you name your spouse as the successor holder of your TFSA, the plan assets can transfer directly — and intact — to your spouse’s TFSA. The plan’s securities don’t need to be sold, there are no tax implications, and the contribution doesn’t affect yur spouse’s own TFSA contribution room. As well, the capital in the TFSA will continue to accrue on a tax-free basis and there’s no income tax upon its eventual withdrawal.
Designate a beneficiary. If you don’t have a spouse (or don’t want the assets to pass to your spouse), you can name a beneficiary, such as one of your children. That person’s ability to direct the TFSA inheritance to his or own TFSA will depend on his or her contribution room.
If you don’t designate a successor holder or a beneficiary, the full value of your TFSA will become part of your estate. While the value at death is tax-free, the amount may be subject to probate fees depending on your province of residence. Note also that any growth within the TFSA between the time of death and the time the TFSA is formally closed or transferred will be taxed as ordinary income unless you name your spouse as successor holder.
As with all beneficiary designations, it’s a good idea to review your TFSA designation regulalry. In addition, you may want to seek professional tax advice to ensure your assets pass as you expect.
Larry Kleinmintz, R.H.U., T.O.T., M.D.R.T.
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