Do TFSAs Have Beneficiaries? Do TFSAs Have Successors?
Tax-free savings accounts (TFSAs) in all provinces and territories, except Quebec, allow for naming successors or beneficiaries. In Quebec, your TFSA must be paid to your estate and the beneficiaries of a registered account must be determined by your marriage contract or your will.
And only a spouse can be named as successor to the TFSA. A successor takes over a TFSA account when the spouse dies. and the account becomes their TFSA. It remains tax-free, does not affect their TFSA chamber, and avoids probate or other administrative costs. The account can remain separate or consolidated with their own TFSA. The financial institution will generally only require a death certificate.
So, since you named your spouse as successor, Ian, it would go 100% to your spouse upon your death.
If your spouse dies before you, the beneficiary designations apply. The bill will be split equally among your children, Ian.
If a spouse is named as a beneficiary rather than a successor, they can still benefit from a tax-free rollover to their own TFSA. However, any growth in the TFSA account after death would be taxable income. A transfer of the market value of their deceased spouse’s TFSA to the date of death can be made to their own TFSA without affecting their TFSA chamber. It must be done no later than December 31 of the year following the death to qualify as an exempt contribution.
What if your TFSA does not have a successor?
It should be noted that for those who opened TFSAs right away when they were introduced in 2009, their financial institution may not have given them the option to name a successor, perhaps only a beneficiary. It may be worth double checking now and appointing a successor spouse, assuming this is your wish.
If you do not name a successor or beneficiary to your TFSA, your TFSA must be paid to your estate.
Probate Taxes and Inheriting a TFSA
When a registered account, such as a TFSA, is payable to a named successor or beneficiary, there is no estate or estate tax due. Inheritance or estate taxes are payable to the county or territory on certain assets that are part of a deceased person’s estate and are distributed by their will, which generally includes assets with no named beneficiaries.
Naming children or the estate as TFSA beneficiaries
It’s worth noting, Ian, that if your children are minors in your county or area of residence, there may be drawbacks to naming them as beneficiaries of your TFSA. If you and your wife are both deceased and the children were entitled to the TFSA proceeds as minor beneficiaries, the bill may become payable to their court-appointed guardian (probably the one you named in your will) or the public guardian and trustee (a provincial or territorial office).
Both would be responsible for managing the funds until your children reach the age of majority, after which their share is paid out to them.
It may be preferable to name your estate as the beneficiary rather than your minor children so that the more detailed and specific terms of your will apply. This may include a trustee for your children’s assets and instructions on how to manage, use and distribute those trust funds among your children, terms normally included in a will for an executor with minor children.
Even if your children are of age, another reason to consider naming your estate as a beneficiary rather than your children is in the event that one of your children died at the same time as you or before your death. If a TFSA beneficiary has already passed away, their share of a TFSA is generally payable to the other TFSA beneficiaries.
You may think that you would simply change the designation of your beneficiaries if something happened to one of your beneficiaries, but that is not always possible. Imagine a situation in which dementia makes you incapacitated for work. One of your children dies during your incapacity for work. If you were able to do so, you could change your TFSA so that 50% is paid to your surviving child and the other 50% to your deceased child’s children (your grandchildren).
If you were incapacitated for work, you cannot change your beneficiaries. Also, someone acting as a real estate agent cannot change your designation of beneficiaries. This is an advantage of naming your estate as a beneficiary rather than your children, albeit at the cost of paying estate or estate taxes and a slower estate settlement process.
In summary, Ian, based on the information provided, on your death your TFSA would be inherited by your successor spouse. If your spouse has died, it will be paid out to your children as beneficiaries. In neither case would inheritance tax or inheritance tax apply. Hopefully your question and my input will prompt some thinking about TFSAs, tax and estate planning for other TFSA holders out there.
Jason Heath is a board-certified financial planner (CFP) who pays only a fee and provides advice only at Objective Financial Partners Inc. in Toronto, Ontario. He doesn’t sell financial products at all.
This post What Happens to Your TFSA When You Die?
was original published at “https://www.moneysense.ca/columns/ask-a-planner/what-happens-to-your-tfsa-when-you-die/”