At death, registered assets can pass tax-free “in kind” to a qualified, specifically designated beneficiary (typically your spouse or a dependent child). But what if you don’t have a qualifying beneficiary? Or your child reaches the age of majority and no longer qualifies as a dependent? Or suppose you and your spouse die at the same time. What happens then?
In that case, your registered assets will be treated as though they had been sold. Their full market value will be counted as ordinary income on your final tax return and it will be taxed at your highest marginal rate. This can have profound implications for your estate and your beneficiaries.
But if leaving a legacy to a charity or your alma mater interests you, here’s one possible solution: Consider naming a registered charity as your alternate beneficiary.
In the absence of another named beneficiary at death, the asset will be given to the charity. Your estate will get a charitable tax credit for the market value of the assets at death. As a bonus, this could allow your registered assets to bypass probate, and thus avoid probate fees in provinces where they apply.
Depending on the size of your registered plans and the value of the rest of your assets, this approach could significantly reduce your final tax bill. And it could even result in a larger residual estate than if you had left the assets directly to your child.
If you haven’t yet filled out a “multiple-beneficiary designation form,” or you’d like to discuss your options, please contact our office.
Larry Kleinmintz, R.H.U., T.O.T., M.D.R.T.
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