TFSA Estate Planning options

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The TFSA (Tax Free Savings Account) has become a popular saving and investment vehicle for many Canadians. It has also potentially become a significant portion of retirement savings.

When TFSAs were first introduced I thought they were pretty straightforward. However, we still get lots of questions, and Gordon Pape wrote an entire book about them (The Ultimate TFSA Guide), so there’s still some confusion.

A lot has been written about how to invest within a TFSA, but what happens to these funds when the planholder dies? The amount in the account at the date of death is tax free: then it depends on who the funds are given to.

Estate Planning For Your TFSA

There are three different estate planning options for your TFSA:

  1. Appoint a successor holder
  2. Designate a beneficiary
  3. Assign the funds to the estate

Successor holder

Only a spouse or common-law partner can be appointed successor holder.

The benefit is the TFSA is transferred to your spouse directly without probate fees or a waiting period.

The plan continues to exist on a tax-free basis and the spouse becomes the new account holder, although it will no longer have any contribution room.

If the successor holder already has their own TFSA, they then would be a holder of two separate accounts. The spouse can make new contributions to the account subject to their own unused contribution room.

If they wish, they can directly transfer part, or all, the value to their own TFSA to consolidate the accounts, making it easier to manage. This would be considered a “qualifying transfer” and would not affect available contribution room.

The spouse can also cash in the TFSA with no tax consequences.

Designated beneficiary

A designated beneficiary can be a spouse, or anyone else you name. At the death of the planholder, the beneficiary will receive the assets at the time of death tax free, and the plan will be terminated.

Any income earned after date of death is taxable in the hands of the beneficiaries.

If the beneficiary is a spouse or common-law partner, he or she can transfer all or part of the TFSA (the amount at time of death) to their own account without impacting their own contribution room. To be considered a qualified “survivor” payment, the funds must be transferred within the “rollover period” which is from the date of death to December 31 of the following year.

However, any growth after death would require new or unused TFSA contribution room and is subject to tax.

Avoid naming a spouse together with other beneficiaries because then the spouse won’t receive survivor status.

Naming the estate

You can name your estate as beneficiary and, if no successor holder or individual beneficiary is designated, the TFSA will become part of the estate. The funds will be distributed in accordance with the deceased’s will. Any income earned after death is included in the taxable income and paid by the estate.

Final thoughts

Determining the type of beneficiary is important and can be affected by:

  • the designation set up in the planholder’s TFSA contract
  • the provisions of the will
  • provincial legislation

When I opened my TFSA, Alberta did not allow the successor holder designation, but most provinces have now updated their laws to allow for it. Quebec is the exception, only allowing beneficiary designation through the deceased’s will.

You’ll want to double check with your TFSA administrator to determine whether a successor holder has been named for your spouse.

Marie Engen is the “Boomer” half of Boomer & Echo. In addition to being co-author of the website, Marie is a fee-only financial planner based in Kelowna, B.C. This article originally ran at the Boomer & Echo site on June 13th  and is republished here with permission.

 

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