Ensuring the protection of our assets in the event of our death or incapacity is a common concern. It’s important to align our long-term goals with the beneficiaries of our work. When it comes to TFSA (Tax-Free Savings Account) holder, there is a significant designation known as the successor holder, which may be more important than simply listing a beneficiary. Opting for a successor holder instead of a beneficiary can have its advantages, and it’s worth considering.
Having a beneficiary or successor holder named in your bank account brings several benefits. It expedites the process for your loved ones to access funds and investments after your passing. This helps reduce the costs associated with probate and prevents the money from getting stuck in the estate administration process, which can be time-consuming.
Another advantage of having a designated beneficiary or successor holder is the preservation of privacy. If you don’t specify a beneficiary, your assets will pass through your estate, which becomes public information. By naming a beneficiary on your account, your assets can be directly transferred to the intended individual without public scrutiny.
In the case of a TFSA account, there is an additional option to consider. Paying attention to the details in personal finance can yield significant impacts. With a TFSA holder, you have the opportunity to name both a beneficiary and a successor holder, ensuring a smooth transition of ownership in the event of your passing.
Comparing TFSA Beneficiaries and Successor Holder
When it comes to TFSA (Tax-Free Savings Account), there are important distinctions between beneficiaries and successor holders, particularly in terms of how the money in their accounts is taxed. Understanding these differences is crucial when considering the transfer of TFSA assets to beneficiaries or successors.
TFSA beneficiaries receive the money in the account tax-free upon the account holder’s death. This means that the inherited funds remain tax-free for the beneficiaries. However, any contributions made to the TFSA after the account holder’s death would be subject to taxation.
On the other hand, a successor holder assumes ownership of the TFSA account itself. They have the option to transfer the account to their own TFSA without affecting their contribution room. As long as the successor holder keeps the money in the TFSA, they are not liable to pay taxes on it.
A beneficiary, however, can use the assets from the deceased account holder’s TFSA to contribute to their own TFSA, but within the limits of their available contribution room. For example, if a friend has $5,000 of contribution room, they could allocate up to $5,000 from the inherited TFSA assets to their own TFSA, but not more.
There is an exception to this rule, which applies to spousal or common-law partner beneficiaries. If you name your spouse or partner as the beneficiary of your TFSA, they can receive the funds and contribute an amount that exceeds their contribution room by utilizing the assets from your TFSA. The TFSA assets would be “rolled over” into their own TFSA.
It is important to note that there is a limited time window after the TFSA holder’s death to make a tax-free contribution. To ensure the preservation of your TFSA and allow your surviving spouse or partner to maintain it, it is advisable to designate a successor holder. This provides more flexibility, as your spouse or partner can use the TFSA assets to make contributions to their own TFSA, surpassing their contribution limit.
It is possible to have both a beneficiary and a successor holder for your TFSA. The beneficiary receives the money in the TFSA tax-free but loses the tax-free space, as the TFSA account is closed. If the beneficiary doesn’t have sufficient funds in their TFSA to make contributions, any future investment gains would be subject to taxation.
In contrast, a successor holder inherits the TFSA account and its contents, retaining the tax-free space. They can continue using the TFSA and even regain the contribution room if they do not contribute in a particular year.
It’s worth noting that the TFSA is a versatile account that can be utilized for retirement savings or to supplement government benefits. Preserving the TFSA space for future use is desirable if feasible.
It’s important to understand that not everyone can be a successor holder. Only individuals who are married or in a common-law relationship qualify for this designation.
For instance, siblings can be designated as beneficiaries to receive the money in a TFSA, but they cannot become the account owner. Similarly, the current TFSA account owner cannot be listed as a beneficiary.
Selecting the Optimal Option
When it comes to registered accounts, it’s crucial to assess whether you have a suitable beneficiary in place. This could include your spouse, partner, or a dependent minor child or grandchild. When considering RRIFs (Registered Retirement Income Funds), contemplate the possibility of keeping the funds within a TFSA or RRIF.
Managing your finances after your passing involves various options, and it is essential to consult with a knowledgeable financial advisor to determine the most suitable approach for your circumstances.
Determine Your Recipients
It’s essential to always consider who will be the recipients of your funds when opening a new account, especially in the event of your death. Over time, circumstances may change, such as having children, getting married or entering a new partnership, or being single. If you have a TFSA, ensure that you have designated your spouse or common-law partner as the inheritor of your TFSA funds. This will enable them to quickly handle various matters.
In some provinces and territories, you have the option to name a beneficiary for your TFSA. This individual can be designated as the person who will inherit your TFSA upon your passing, either explicitly in your will or through other arrangements.
It is also possible to name a successor holder in your will, who will have full rights and authority over your TFSA, including the ability to modify beneficiary designations and other instructions related to the account.