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February 16, 2022

Review RRSP beneficiaries regularly to avoid estate problems

With the RRSP deadline just around the corner, inattentive investors can easily lose sight of a critical tax detail: designating a beneficiary for their money in case of death.

Estate If you're married or living in a common-law relationship, you're probably better off to name your spouse or partner as the beneficiary, allowing the funds to be rolled over to them, tax free.

This way, your RRSP assets can be rolled over to his or her plan at your death, allowing you to avoid paying tax until the surviving spouse is faced with his or her own final tax return.

You can also name your estate as the beneficiary and then leave your estate to your spouse, a dependent child or a grandchild in your will, though probate fees will apply.

If you die and you have a designated beneficiary, your RRSP gets cashed and that person or group gets its full value. The funds pass outside the will, without probate, which can save up to 2 per cent of the asset’s value, depending on the province and its probate fees.

Not keeping track of such items can scuttle your estate plan and lead to squabbling among your heirs, warns Ed Olkovich, a Toronto estate lawyer and author of Breakthrough Estate Planning.

Periodically revisiting designations is important, he adds, especially given current divorce rates and blended families.
No estate plan will work if it’s out of date, Olkovich notes. Birth, adoption, divorce, marriage, death, and other factors may change the beneficiaries in your will or the assets you plan to leave them. 

What can go wrong? Well, one Vancouver widow was surprised to find that when her husband died that he left all of his RRSPs to his sister. Because there was no RRSP spousal rollover possible, tens of thousands of dollars in tax came out of the wife's inheritance, while the man's sister got the full value of his RRSPs -- which is not likely what the deceased intended.

Have you ever bothered to review that RRSP paperwork? Any changes? Any recommendations?

By Gordon Powers, MSN Money



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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...

Jason BucklandJason Buckland

The modern-day MC Hammer of money, Jason can often be seen spending cash that isn’t his with the efficiency of a Wilt Chamberlain first date. After cutting his teeth as a reporter for the Toronto Sun, he joined the MSN Money team with...