Who Should Be a Beneficiary?

Fast forward ten years later when I was going over my life insurance needs with an advisor and we reached that age-old beneficiary question. My mom was still listed as the beneficiary. I hadn’t made any changes over those ten years, even though I had since acquired a home, a mortgage, and other obligations.

I wanted to name the estate as the beneficiary so that the life insurance could be used to pay off any debts I had rather than needing my house to be sold immediately to cover those costs. I was advised to keep her as the beneficiary to avoid “taxes”.

Life insurance isn’t taxable for the beneficiaries. The advisor was instead focusing on the potential for probate costs, which is an issue in provinces where probate is more expensive. In Alberta, probate fees have a maximum cost of $525 plus legal costs (other provinces have probate fees being a % of the total value of the estate!).

At the end of the day, it made more sense to me (and most Albertans) to have the estate become the beneficiary of my policy. Sure, that means that my estate will need to go through probate but because I had other assets (such as my house), probate was going to be inevitable. At least this way, the life insurance can help pay any taxes and my beneficiaries can split what’s remaining.

RRSPs

Now what about RRSPs? Unlike life insurance, the wrong beneficiary named on your RRSP account could result in some unattended tax consequences.

If you have a spouse, naming them as beneficiaries of the RRSPs are your best option from a tax perspective. When you name your spouse as beneficiary, the RRSPs simply roll over to them without triggering any tax.

But sometimes that might not be an option. Either you aren’t married or you are trying to equalize your assets between your current spouse and your children from a previous marriage, for example.

Let’s say you are recently married but you had previously named your siblings as the beneficiaries of your RRSPs. When you die, your estate pays tax on the fair market value of your RRSPs – even though the RRSPs are getting transferred directly to your siblings and skipping the estate. This means that your spouse is left paying the tax on money that they aren’t receiving. They might need to remortgage the home in order to cover these costs. Yikes! Is that what you were intending?

This is why it is always important to update these accounts whenever you have major life changes and to also

Bottom line – make sure that you speak with an advisor about your end goals and how you want your assets to be divided, and how you can achieve that with proper planning to be in accordance with your final wishes.

by Jillian Koch - JMH & Co

Who Should Be a Beneficiary?

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