RRSP/RRIF spousal transfers on death - not so automatic

Warning! This post talks about tax. I realize that not everyone finds tax information as interesting as I do, but it's important stuff for all of us.

I'm attaching a link to a blog post by accountant Mark Goodfield, better known as The Blunt Bean Counter. In this post he talks about the transfer of an RRSP or a RRIF from a deceased spouse to a surviving spouse. You might be surprised to find that a spouse can choose simply to take the funds outright rather than receive the funds into his or her own RRSP or RRIF. If that happens, the estate may end up paying the tax.

Click here to read the article, which is very readable and contains tons of good information.

Does an executor have to pay estate taxes personally?

The toughest part about being an executor is the learning curve; most executors do the job only once during their lifetimes and frankly most are happy not to have to repeat the role. It may seem relatively straightforward to say that the executor is in charge of the estate, but the details can be very challenging. Tax issues are particularly challenging. A reader has a question about executors and taxes that I thought everyone would find useful:

"My brother is the executor for our father's estate. He left us a RRIF to each of his children (and common law spouse) which is not considered part of the estate. There are potentially large taxes to pay on this plus other taxes. Who is responsible to pay? If there is not enough funds in the estate is the executor responsible for outstanding debts/taxes? He fears he may be made bankrupt from his personal savings."

You're right that assets with designated beneficiaries, such as a RRIF (also including RRSP, life insurance policies, pensions, LIRA, etc) do not fall into the estate. They are paid directly to the beneficiary named.

You're also right that there could well be a big tax hit on the transfer. Money that is contributed to a RRIF is put in on a tax-deferred basis. The income tax is paid on it when the money is taken out of the RRIF. The law says that when you die, your RRIF is deemed to be cashed one minute before your death. Therefore all of the money comes out at once, and the tax all becomes owing.

The portion of the RRIF that is going to your father's common-law wife may be eligible to be rolled over to her without tax being paid.

The taxes must be paid by the estate, even though the RRIF money didn't go into the estate. This is often hard for people to accept, because it may not seem fair that the people inheriting the residue are the ones who basically are paying the tax. However, the tax on the RRIF is a debt of the deceased and his estate is responsible for his debts.

Your brother should work with an accountant or lawyer who specializes in estate and tax matters to ensure that he becomes aware of all elections, deductions, carry-overs or other tools that might be available to minimize the taxes.

Should an estate not have enough assets to pay the taxes, the executor is not personally responsible for paying them. His job is to administer the deceased's affairs, not to involve his own money. This is just one more reason executors are always advised to keep their own funds strictly separate from estate funds. Unless he has been fraudulent or negligent in his administration of the estate, he should have no fear of damaging his own finances.

I appreciate you taking the time to send me a question. Please understand that these are the general rules that apply to estates and taxes, and that specific facts in your case could conceivably bring about a different result. I strongly urge your brother to seek professional guidance.

Photo from http://www.dreamstime.com/

Life insurance fertilizes next generation of farmers

Estate planning for farming families is complex. It's also very satisfying for a practitioner like me, because there are so many effective strategies that can be used to help transfer the family farm to the next generation. The attached article from http://www.capitalmagazine.ca/ describes how life insurance policies and mortgages can be used to meet the needs of all parties to the transaction. Click here to read it. The attached photo is also from that story.

Spousal rollover on death

If you're an executor wondering about dealing with assets that may be eligible for rollover to a spouse, read this article from All About Estates before making a decision.