Tax considerations regarding retirement assets are a critical aspect of estate planning if you want to minimize your beneficiaries' tax burden. Here let's discuss some basic strategies for ensuring that beneficiaries are able to access and make the most of any retirement savings to be distributed.
Whether you have a Registered Retirement Savings Plan or a Registered Retirement Income Fund, you can name a beneficiary to whom the funds can be rolled over tax-free. If a beneficiary is not named, then RRSPs and RRIFs are typically taxed at high rates in the year of death.
A tax-free rollover is allowed, however, if you designate as beneficiary your spouse, common law partner, dependent infirm child or grandchild, or dependent child or grandchild who is a minor.
Alternatively, you could name your estate as the beneficiary and specify in your will how your retirement monies should be distributed.
Keep in mind, too, that distributing a lump sum of retirement savings could result in a heavy tax bill. If you have minor children, then one way to minimize the tax on their inheritance is to use your retirement plan proceeds to purchase annuities, which can then be paid out to the children over the course of several years.
Clarifying your beneficiary designations and ensuring that they are consistent with your will and other documents is also helpful in avoiding probate fees. If you haven't named a beneficiary for your RRSP or RRIF, then those monies may become tied up in probate and may not be available when your loved ones need the funds the most to cover funeral expenses and other costs.
Unfortunately, sometimes these and other estate-related matters remain unaddressed until it's too late, and beneficiaries find themselves in conflict. For more on resolving inheritance-related disputes, please see Hagel Lawfirm's inheritance planning overview.