Is it better to list a beneficiary on registered investments or have the account go to the estate?

Named beneficiaries vs the estate—which is better?

Thanks for writing in, Catherine. A common thing we think about when doing our estate plan is how to make transferring our assets and money to friends and family go smoothly. So, naturally, this brings up the questions: How should you handle your investment accounts? And what makes the most sense for your situation?

First, let’s review the pros and cons of naming beneficiaries in registered accounts versus not naming anyone and having the account flow through to the estate.

Naming beneficiaries on registered accounts

Depending upon the type of registered investment account you hold, Catherine, there may be some planning opportunities for the asset. In every province and territory, except for Quebec, Canadians can name beneficiaries on the registered account. (Note: Under Quebec’s legislation, you can only do so in a will.) The types of accounts that allow for named beneficiaries include registered retirement savings plan (RRSP), registered retirement income fund (RRIF), tax-free savings account (TFSA), registered education savings plan (RESP), and segregated funds. In contrast a non-registered account does not allow for the naming of beneficiaries and therefore the account will go to the estate if there is no surviving joint account holder.

While each type of registered account has rules and stipulations on how many beneficiaries can be named or who can be specifically added as a beneficiary, the pros and cons for naming beneficiaries below can be generalized.

Pros

The biggest pro for naming beneficiaries for a registered investment account would be that the asset would then avoid probate tax. Probate tax is a fee paid when the executor of the estate applies to the court for their certificate of appointment, which grants them the legal authority to administer the estate.

Catherine, this can become costly, depending on which province you live in. In Ontario, for example, the rate is 1.5% calculated on the estate’s assets (after the first $50,000). Whereas in Alberta, the fees are flat-rated based on the estate’s value in a laddered approach (i.e., $10,000 or under is $35). Naming beneficiaries directly on these accounts allows the investment to bypass the probate process and the asset can be sent directly to whomever you’ve named.

Another benefit would be privacy. You can directly name a beneficiary on the registered investment accounts, and no one needs to know. Aside from yourself, the financial institution and the beneficiary, of course. This could be helpful if there was someone you were hoping to leave money to but didn’t want anyone else to be involved.

Cons

You may be thinking, what possible negative outcome could there be in naming beneficiaries in my investment account? It does seem like a bit of a no-brainer; however, there can be some adverse tax consequences you should be aware of, Catherine. While the investment account goes directly to the named beneficiary, income taxes will still need to be paid.

When someone passes, they do not take their assets with them. And in the eyes of the Canadian government, the assets are “sold” to the estate on the date of the death. Ultimately, this is a “deemed disposition” and—you guessed it—registered investments are also disposed of on death.

As a result, most terminal tax returns (the tax return filed on the year of death) carry a heavy tax bill, and if the investment went directly to a beneficiary, where does the cash come from to pay for the income taxes? The estate’s beneficiaries in the will are paying the taxes on an asset that went to someone else through the registered account. That’s a big con to consider.

What happens when no beneficiary is named on a registered account?           

Sometimes, depending on your circumstances, Catherine, you may not want to name beneficiaries on the registered account. Much like our fingerprint is unique, so are our estate plans and wishes.

Your decision on naming someone on an account or not could depend on how you are laying out the structure of your beneficiaries in your will. Perhaps you’ve included charities, various trusts set-up, or you have many people you are hoping to leave money to.

Regardless of why you may choose to have a registered investment go into your estate, this approach also bears pros and cons.

Pros

Having an asset come into your estate and paying the probate tax is not always “bad.” Our wills are our wishes for how we want to see our assets given to our beneficiaries, and sometimes having everything you own go through the estate works best for your situation. It allows for the setting up of trusts and to distribute money to beneficiaries at various ages—versus receiving their inheritance all at once.

Naming the assets to beneficiaries in your will also allow for the estate to be equally distributed between beneficiaries—versus one person receiving the asset outright and the remaining beneficiaries paying the taxes on the inheritance. Having one group of people pay the taxes for someone else can be a fast lane to family arguments or discord.

Cons

Having registered accounts in the estate means that they are now a part of the estate. If your estate becomes contentious between the beneficiaries, those registered accounts are also a part of that. When you directly name a beneficiary, it is not usually subject to any issues within the estate.

Bottom line

So, Catherine, there are many things to consider when determining whether to name a beneficiary directly in the registered investment account or not. The good news is that many professionals, such as Certified Financial Planners, accountants and lawyers, can help you arrive at the best decision for you.

Thanks for your question.

Debbie Stanley is the CEO and Senior Estate Administrator at ETP Canada, a boutique firm located in Guelph, Ontario, specializing in estate administration. ETP Canada helps executors navigate their role with executor support, estate accounting, and professional executor services, and most recently launched an online course designed for Canadian executors called Executor Ready.

Read more on estate planning:

• Can I leave a house to minor children?
• Is the family responsible to pay the mortgage for a loved one who has passed away?
• What are the fees for becoming a joint tenant on a parent’s property?
• What are the taxes on transferring real estate to your kids?

About Debbie Stanley, TEP, MTI

Debbie Stanley is an estate and trust professional, and CEO of the estate firm ETP Canada. She is a writer, speaker and regularly featured guest on Zoomer Radio.

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