Don’t let beneficiary designations get lost in the shuffle from RRSP to RRIF

Updating your beneficiary designations can keep your estate out of the courts after you’re gone. 

Beneficiary designations on RRSPs, life insurance policies and Tax-Free Savings Accounts and other assets are rarely the first things that come to mind when people think of an estate plan, but they are often among the most important. 

However, naming a person to inherit the funds when you open an account is not always enough to ensure they get the money, as a recent court decision demonstrates. 

The case concerned a Toronto man with no close family who decided to name his friend as the beneficiary of several RRSPs he opened in the late 1980s. The man later moved to California to live in a monastery, but would return every summer to stay with the friend and his wife.

After the man turned 71, his banks converted his RRSPs to RRIFs as required by the federal Income Tax Act, but he failed to update the beneficiary designation on the technically-fresh financial instruments before his death in 2015, which was followed a short time later by the death of his friend.

The friend’s surviving spouse then brought the court application to have her late husband’s estate named as the beneficiary of the RRIFs. The judge in the case granted the application, writing that he was satisfied the account owner had “effected a gift of his RRSP Accounts and the derivative RRIF Accounts” to his friend.

In the end, the court reached the right result and the RRIF money ended up in the hands of the people that the account owner desired. But in the meantime, years had passed, and the cost of the litigation has likely taken a large chunk out of the ultimate value of the assets.  

In this case, the fate of the RRIF account proceeds may always have been destined for the courts, since the owner died intestate. But those with a will in place have even more to gain from making and regularly updating beneficiary designations.

Naming someone to receive the funds from your plan or policy allows the money to flow straight to them following your death, bypassing your estate. If nobody is designated, then they could become subject to probate and the 1.5-per-cent Estate Administration Tax otherwise payable on all assets in the estate over $50,000.  

Apart from avoiding an unnecessary levy on their windfall, heirs will thank you for designating them as beneficiaries because of the time and hassle they will save by staying away from the probate process. It can be a draining experience, since it routinely takes months for executors to get the court’s seal of approval via its overworked estates office, before they can start distributing assets. 

Still, it’s crucial that you stay on top of your designations, especially if you’ve been married more than once or have anything but a conventional family arrangement. These accounts are often among the most valuable assets in an estate, so there is a good chance that feuding family members will seize on any ambiguity or confusion over the intended beneficiary.  

That’s why I recommend testators check their beneficiary designations still make sense at the same time as they update their will – every couple of years, or at least after major life events such as the birth of a child, marriage, divorce, or a major change in net worth. 

Disclaimer: The content on this website is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Users of this website are advised to seek specific legal advice by contacting members of Laredo Law (or their own legal counsel) regarding any specific legal issues.