Financial: Who? Why? Think about your beneficiaries – it’s financially important

You should have a will, of course. Otherwise it's highly unlikely that your legacy will be passed down as you wish and highly likely that winding up your estate will cost more in taxes, fees, acrimony and family squabbles than you ever imagined.

So, if you haven't done so already (and that's an equal odds bet because almost half of all adult Canadians don't have one) get going on your will today. But, whether you have a will or not, whom you designate as your beneficiaries can have a big impact on the value of your estate and on other aspects of your financial life. Let's look at some of the considerations you should be aware of when designating beneficiaries.

Registered Plans

When you designate a beneficiary on your Retirement Savings Plans (RSPs) or Retirement Investment Funds (RIFs) your beneficiary typically receives the full value of the asset directly from your financial institution. (In Quebec, the law is not as clear on beneficiary designations for registered plans, so check with your legal advisor.) If your RSP/RIF beneficiary is your spouse, or a child or grandchild who is financially dependent due to a physical or mental impairment, your registered assets may also retain their tax-deferred status when transferred.

If the asset is taxable on transfer, it is usually your estate that will pay the tax liability – not the beneficiary. This can derail your desire to leave an equal legacy to your beneficiaries. Here's an example: Say you have two adult children and you want them to share equally in your estate. You name your son as beneficiary on your $200,000 RSP and leave $200,000 in cash to your daughter. Upon your death, the $200,000 RSP will typically pass outside your estate, to your son – but it will also be considered income on your final tax return. The income taxes owed on your RSP will have to be paid out of the assets in your estate – the $200,000 in cash left to your daughter. So she may end up with much less than you intended.

Life Insurance

You may have purchased life insurance with the intention that the proceeds will be used to cover your estate's outstanding debts and taxes. If you designate a beneficiary, the proceeds typically pass tax-free to that individual. But if you name your estate as the beneficiary, the proceeds will become part of the estate's value and are subject to probate. In provinces with high probate fees, such as Ontario and British Columbia, the cost can be significant. (Probate does not apply in Quebec in all circumstances, but is usually not a significant expense when it does apply.) So, it's always better to name an individual as the beneficiary on your life insurance, right? Not necessarily. For example, your executor may need access to those life insurance proceeds to pay estate bills or to carry out some of your final wishes.

A potentially money-saving alternative is an insurance trust, which allows the proceeds to be distributed according to your will, but still avoids probate fees. The insurance trust must be set up properly in your will.

Before you name your beneficiaries, talk to your legal, tax and financial advisors – to make sure your estate and legacy will be exactly as you wish.

(Submitted by Damon Smith, Investors Group Financial Services Inc. For more information call 888.335.1362).

This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.

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