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Avoid creating tax burden in estate plan

By Peter Okonski, Catholic Register Special

When you start considering who should inherit various parts of your estate and other assets, think about the most tax-effective solutions that avoid creating tax burden for your beneficiaries.

Registered Retirement Savings Plans (RRSPs) continue to be a significant part of Canadians’ assets. Upon owner’s death, the RRSPs are treated as income, determined at the fair market value and taxable at the deceased marginal tax rate. However, there are certain categories of beneficiaries who get the proceeds tax-free.

A spouse or common-law partner, who is a beneficiary, can roll over the RRSP assets into their own RRSP without paying taxes. The funds will grow tax-free until they are withdrawn from the account.

It is also possible to designate a financially dependent child or grandchild as the beneficiary. In such a case, the RRSP will be transferred directly into a term certain to age 18 annuity in the child’s name.

The RRSP proceeds of a deceased individual can also be rolled over to the Registered Disability Savings Plan of the deceased individual’s child or grandchild, whose dependency stems from physical or mental impairment.

Naming a charity as a beneficiary is another option. Although the value of the RRSP will be included in the final tax return, the income tax will be practically eliminated by a tax credit; thus, a charitable designation of the retirement funds is tax-neutral.

Registered Retirement Income Funds (RRIFs) are similar to RRSPs. Looking from another perspective, both are two parts of the process of, first, saving and growing the assets in the plan, and then using them as the income fund when the owner no longer works.

An important feature in both RRSPs and RRIFs is the fact that they can grow tax-free and only the withdrawn amounts are taxable. It is worth remembering that RRSPs have to be converted to RRIFs by the end of the year the owner turns 71.

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