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Friday, July 1, 2011

Naming the estate as beneficiary

I'd like to talk about this reader question in today's post, as it's something that almost everyone will think about during their estate planning. Here's the question:

"It would seem to me that naming a person as a beneficiary instead of an estate would be the easiest and fastest route for distribution. Is there some benefit that I can't see to naming an "estate" as a beneficiary."

Assets that can be designated as going to a certain beneficiary are RRSPs, RRIFs, LIRAs, segregated funds, life insurance policies, pensions and a few less common assets. Designating a beneficiary means that at the time you buy or set up the asset, you state on the asset itself who is to receive that asset when you pass away. Assets with designated beneficiaries are not controlled by your will, unless they name the estate.

This brings us to the reader's question. Why would someone designate their estate to get the funds rather than leaving them directly to a beneficiary? Keep in mind that there is no right answer for everyone. For many people it's a good idea to name a beneficiary directly, while for others it's clearly advantageous to name the estate. Each person (hopefully with the help of an estate planner) will have to figure out his or her best course.

Let's look at an RRSP or RRIF. As most people know, money goes into these plans without being taxed first, and the tax is paid when the money comes out. When you pass away, the law says you are deemed to have cashed in your RRSP or RRIF, so the entire amount becomes taxable all at once. The only way you can save this tax is to designate your spouse (and in limited circumstances a dependent child) as your beneficiary and roll the plan over to him or her. This usually, though not always, means that designating the spouse is a better idea than naming the estate. If the estate were named as beneficiary, the tax would be payable.

Not every asset carries a tax liability, which gives more flexibility in naming a beneficiary. For example, life insurance policies are not taxable in the hands of the person who receives the funds. And the reader is correct that naming a beneficiary can be simpler. If the life insurance money goes directly to a person rather than the estate then there is no need to get probate just to deal with the life insurance.

However, life insurance is often left to a person's estate. This is not at all unusual because naming your estate as the beneficiary of your life insurance policy is a way of creating more cash in your estate. The estate doesn't have to pay tax on the life insurance money  it receives. Business owners like this because it allows them to leave something in the estate for their children who are not inheriting the family business. Individuals with cottages like to leave insurance money in their estates to pay the capital gains tax on the cottage so that the cottage can be kept in the family. A person with lots of debt or taxes might leave life insurance to cover those debts or taxes. These are just a couple of examples but there are several good reasons to leave life insurance to the estate. 

Estate planning is designed to ensure that all aspects of your financial life - will, business agreement, power of attorney, joint property and designated beneficiaries - all work together to achieve your goals.


  1. Hi Lynne. Thank you so much for answering my question. I just realized now that you answered it in a new post. This makes it much clearer and I thank you for that.

  2. Hello Lynne, if I have two dependent children (they are not disabled), should I designate them as beneficiaries in my RRSP (they will buy annuities till they are 18) or I should change RRSP designation to my estate and appoint them in my will?
    The goal here is to postpone/minimize taxes

    1. If the goal is to minimize taxes, neither of the strategies you've named has an obvious advantage over the other. You cannot get a tax-deferred rollover by either means. In terms of providing for minor children, keep in mind that if you name your estate as the beneficiary and the will sets up a trust for the kids, the RRSP proceeds will form part of that trust. That means if you've specified certain ages to receive disbursements, for example, the RRSP money would be handled that way.

      If you are interested in actually crunching the numbers to determine the exact tax treatment of the two scenarios you've mentioned, I suggest sitting down with an accountant. Accountants are the true masters of tax.



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