My spouse has passed away. Can I name my kids on my RRIF?

One of our regular readers has sent in a question that I believe many of you will find interesting. It deals with the designation on a RRIF when your spouse predeceases you. Read on to see his question and my comments.

"My spouse has passed away. When I die can I put my children as beneficiary on my RRIF  or does it go to my estate?"

If your RRIF currently names your spouse as your beneficiary and you do not change it, on your death the RRIF will go to your estate. It will then be distributed according to your will.

You can change the beneficiary designation to your children if you wish. The better question is should you change the beneficiary designation.

The difference between naming your spouse on the RRIF and naming your children on the RRIF is a tax issue. The proceeds of a RRIF are taxable when they are paid out of a RRIF. When you die, the RRIF is paid out so the funds are taxable. However, there is a special provision for spouses that allows you to roll the RRIF over to your spouse at the time of your death on a tax-deferred basis. In other words, when you die, your spouse can have your RRIF without paying tax at the time. Your spouse will only pay tax as she takes money out of the RRIF.

This rollover is not available for your children. They can still have the entire RRIF, but your estate will have to pay the tax on it. If there is not enough money in the estate to pay the tax on the RRIF, Canada Revenue Agency has the option to pursue one or all of the children for the tax.

If your will leaves your estate equally among your children, there is not a lot of difference between leaving the RRIF to your children and leaving it to your estate. That is, of course, assuming there is enough money in the estate to pay taxes and assuming that all of your children survive you.

There is a difference in these two scenarios if one of your children predeceases you. Let's look at an example. Let's say you have a RRIF with $100,000, a house worth $400,000, and you have two children, Jim and Sal, whom you want to treat equally. If you name your children as the beneficiaries on the RRIF and both of them survive you, each of them will receive $50,000. The house is sold and the tax on the RRIF (say, $30,000) is paid from the estate. The rest of the estate ($370,000) is divided between Jim and Sal. This means each of them gets $235,000.

Now let's look at exactly the same situation but Sal passed away before you. The entire RRIF ($100,000) will go to Jim because he will be the only person named who is alive. Your will leaves your estate to the two kids but if one of them dies then their kids get their share. This means Jim gets half of the estate and Sal's kids share the other half. Jim will get a total of $285,000 (RRIF + estate) and Sal's kids will share $185,000 (estate only). This is quite a difference from the first scenario.

If that is how you want it to work, then great. If you wanted a more equal split, then you could name your estate as your beneficiary. In that case, the RRIF funds would flow into the estate and would be divided according to your will, meaning that Jim would get half of everything and Sal's children would get the other half. Jim would get $235,000 and Sal's children would share $235,000.

In estate planning, first decide what goal you want to reach. Then talk through the various scenarios until you find the one that best reaches the goal.