TFSA and Estate Planning: A Powerful Tool When Properly Designated

TFSA and Estate Planning: A Powerful Tool When Properly Designated

Posted in:

Since the creation of Tax Free Savings Accounts (TFSAs) in 2009 a lot of Canadians have heard about these accounts and as of 2016, 9,974,130 Canadians have actually taken steps to open at least one TFSA.[i]  As the name suggests, any money contributed to these accounts and any income earned in such account is considered tax-free (there are exceptions to this), even when such funds are withdrawn years later (unlike a RRSP). With the contribution space in a TFSA growing each year, someone who was eligible to open a TFSA in 2009, can contribute up to $63,500.00 (if haven’t yet) as of January 1, 2019 into their TFSA(s).[ii] People can open different types of TFSAs that earn income various ways: savings account, GIC, or an investment account as some examples. Multiple TFSAs can be opened as well, provided that the contribution space is not exceeded.  With long term estate planning that can be 20, 30, or more years before retirement, an invested TFSA with additional contributions can be a significant portion of a person’s estate.

Regardless of the different types of financial products that can be held in a TFSA, all these accounts share the same ability to name a beneficiary for that account upon the death of the account holder.  What people sometimes do not realize is: 1) that there are two types of beneficiary designations that can be used for a TFSA and 2) how naming a beneficiary works in the context of estate administration.

Types of Beneficiary Designation TFSAs

  • 1) Simple “Beneficiary” designation
    1. This is pretty straightforward, whoever is named as the “beneficiary” will receive the cash proceeds of the TFSA upon the death of the account holder. The benefits of the TFSA account end upon the death of the account holder.
  • 2) “Successor holder” designation
    1. This is the designation that people tend to not be aware of. Only spouses or common law partners are eligible to be named as successor holders.
    2. The distinction and benefits are important for couples, as instead of receiving the cash value as a regular “beneficiary” would, a successor holder would receive the TFSA “in kind”.
  • This means the spouse or partner upon the death of the account holder, would acquire all the rights of the deceased to the original holder and essentially takes over the account as-is. In other words, any investments do not have to be cashed in, and the surviving space can continue to take advantage of the benefits of the TFSA.

These beneficiary designations can be completed with your financial advisor or with your lawyer as part of your estate planning and writing of your Will.

TFSAs and Estate Administration

An important element of using the TFSA beneficiary designations is that when used, the TFSA assets are not considered estate property.  In other words, the TFSA money does not need to be probated and is not governed by the deceased Will.

Some benefits of this include: 1) getting money to beneficiaries quickly 2) creditor protection 3) reducing the value of the Estate (generally seen as a greater benefit in provinces other than Alberta – but that can be another post on its own).

However, there can be circumstances where it can be beneficial for the TFSA to go to the Estate for distribution in accordance with a Will, every person and scenario is unique.

Feel free to give us a call us at 780-469-0494 or email reception@edmontonlaw.ca  for more information on how to get your estate planning up-to-date.

 

[i] https://www.canada.ca/content/dam/cra-arc/prog-policy/stats/tfsa-celi/2016/tbl02-eng.pdf

[ii] https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/contributions.html