Estate planning for tax-free savings accounts is pretty simple if you’re married or have a common-law partner.
Just designate your spouse or partner as successor holder in the event of your death, rather than beneficiary. “I don’t think it’s the end of the world if a spouse or common-law partner is not named successor holder, but it certainly makes things easier and means less paperwork at the time of death,” said Wilmot George, vice-president and head of tax, retirement and estate planning at CI Global Asset Management. Only a spouse or common-law partner can be named successor holder.
The successor holder designation means your spouse can essentially take over your TFSA on your death on a tax-free basis, regardless of whether they have the contribution room. If you’ve built a considerable TFSA, your spouse or common-law partner would be able to keep it intact and maintain it into the future. You’re essentially ensuring your TFSA legacy.
Spouses, common-law partners as well as relatives, friends and others can be named beneficiary of your TFSA. Your TFSA is tax-free for your beneficiary until the date of death. Gains in the TFSA after that are taxable while they continue to sit in the deceased person’s TFSA until paid to the beneficiary.
”Where the successor holder designation can really be advantageous is if there’s a certain period of time after the date of death where the proceeds remain in the original TFSA and the account goes up in value,” Mr. George said.
He used the example of a TFSA that increases in value by $1,500 in the months after the death of the account holder. With limited exceptions, that $1,500 becomes taxable to the beneficiary, regardless of whom the beneficiary is.
Spouses or common-law partners named as beneficiaries by a deceased TFSA holder can receive the proceeds in-kind or by cheque. Mr. George said they could also transfer the date of death value of the deceased person’s TFSA assets into their own TFSA without requiring TFSA contribution room. However, using the above example, the $1,500 increase in value after death would still be taxable to the beneficiary and would require TFSA contribution room to shelter it from tax going forward.
Transferring the date of death value requires a spouse or common-law partner to complete a Canada Revenue Agency RC240 form. Note as well that transferring this amount to the surviving spouse or common-law partner’s TFSA must be done by the end of the year after the year of death.
If you’re not sure whether you requested the successor holder or beneficiary designation for your TFSAs, make a point to review your choice. If you want to change from one to the other, ask the company holding your TFSA to make the adjustment.