Your RRSP Does Not Follow Your Will

Module 1How the money actually moves

A will governs the estate. A beneficiary designation governs the specific account it sits on, and it operates independently. When the two disagree, the designation wins for that asset.

For most Canadian families the designated assets are not a side issue. The RRSP, the pension and the life insurance together can exceed everything the will controls.

• RRSP and RRIF — pass to the named beneficiary, outside the estate.
• TFSA — a spouse named successor holder takes the account intact; anyone else takes the value.
• Employer pensions — often carry a spousal entitlement that cannot easily be waived.
• Life insurance and segregated funds — pass directly, generally free of tax and of probate.

Module 2The tax trap that makes it worse

On death an RRSP is generally treated as fully withdrawn at fair market value, and the resulting income is taxed on the final return. But the funds themselves go to the named beneficiary.

The result is a split that surprises families: one person receives the account, and the estate — shared by everyone else — pays the tax on it.

Module 3What this does to faraid

The fixed shares apply to the net estate. An asset that never enters the estate is never divided by them.

So a family can do everything right — calculate the shares, have a lawyer draft them, sign correctly — and still have the majority of the wealth pass outside the plan entirely. Worse, where the estate carries the tax on an asset it never received, the remaining heirs are left further from their shares than if nothing had been planned at all.

Module 4The options, and what each costs

There is no single right answer, because every alternative carries its own cost. What is not defensible is leaving it unexamined.

• Name the estate. Brings the asset into the shares — but also into probate, and within reach of creditors.
• Name individuals in faraid fractions. Fragile, because the fractions change depending on who survives you, and a designation does not adjust.
• Name a spouse for the rollover. Defers tax, but faraid gives a wife one eighth where there are children, so this and the shares pull apart.
• Equalise elsewhere in the will. Leave the designation alone and adjust the residue so the overall outcome matches the intended shares. Often the cleanest answer.

Module 5The one-hour review

1. List every registered account, pension and policy you hold.
2. Log in and find out who is currently named on each. Designations made years ago routinely name a former spouse.
3. Decide deliberately, asset by asset, whether it should follow the shares.
4. Take tax advice before naming the estate on a registered plan.
5. Re-check whenever the will changes, and after any marriage, divorce or birth.

Common questions

Does my spouse automatically get my RRSP?

Only if named. A spouse named as beneficiary can roll it over tax-deferred; without a designation it falls to the estate and is taxed.

Can I name my estate as beneficiary?

Yes, and it brings the asset into the faraid shares — but it also exposes it to probate tax and creditors. Take advice first.

What about a TFSA?

A spouse can be named successor holder and take the account over intact. Anyone else named as beneficiary receives the value, with post-death growth taxable.

Is conventional life insurance permissible?

Scholars differ. Takaful is structured to avoid the concerns but is barely available in Canada, so this is a question for your own scholar.