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In contrast, if Thomas expected his tax rate to go from high (45%) to low (20%), investing through an RRSP would be pref- erable. In such a scenario, using the same growth assumptions over 20 years, his net cash at withdrawal in an RRSP would be $15,394, compared to $10,584 in a TFSA. Note that there are often exceptions. For those saving for their first home, the RRSP can provide tax-deductible contributions while allowing up to $35,000 to be with- drawn tax-free for a home purchase. Squeezed in the middle at mid-life Middle-aged clients commonly experience cash-flow pressures due to children, house- hold expenses like mortgage payments and renovations, and sometimes caring for aging parents. Still, it’s important for these clients to understand the importance of retirement plan- ning. This is especially true given the declining availability of defined benefit pension plans. Advisors can also communicate the importance of creating a will. While this is important for clients of all ages, middle-aged couples can face unique challenges at death if their intentions aren’t appropriately com- municated. When someone dies intestate, government legislation defines how the deceased’s assets are distributed. In many cases, the spouse is entitled to a defined share of the estate, often referred to as the preferential share. Amounts in excess of the preferential share are normally divided between the spouse and children. While this distribution might be suitable for some couples, the following challenges can arise: › A common-law partner might not inherit at all, or may be required to pursue other processes to win a share. › Children might inherit directly, which can present problems in the case of minor, disabled or spendthrift children. › A surviving spouse may require the consent of the Public Trustee to deal with assets for minor children. › Taxation is accelerated as transfers to children don’t normally occur on a tax- deferred basis. › If no guardian for minor children is named, the courts will appoint one. In addition, middle-aged couples often face changes in their family structures, whether resulting from a new child, new properties or a relationship breakdown. Whenever significant shifts occur, advisors should work with clients to create or update their estate planning docu- ments where necessary. Estate planning concerns for retirees Retirees must decide the best way to trans- fer certain registered assets (RRSPs, RRIFs and TFSAs) and life insurance proceeds to beneficiaries. With the exception of Quebec, provincial and territorial legislation allows for named beneficiaries on RRSP, RRIF and TFSA contracts, enabling assets to bypass the deceased’s estate and avoid estate administration fees and complex estate settlements. The same is also possible for insurance contracts in all provinces and territories. The alternative is not to name a benefici- ary on plan contracts and to flow the assets through the deceased’s estate to be gov- erned by the deceased’s will (or intestacy rules in the case of no will). Both options have advantages and disadvantages (see “Pros and cons,” this page). It can often be more useful to flow assets through the deceased’s estate by leaving the contract designation blank or naming “estate” as the beneficiary. Doing so allows for greater control after death, potentially through the creation of a testamentary trust. Subject to the deceased’s will, an estate designation can also provide for children or grandchildren of a beneficiary if the beneficiary predeceases the testator, and permit the designation to be auto- matically revoked upon the testator’s marriage. Retirees should also know that, when they pass away, their tax bills for the year of death can spike dramatically. Given Canada’s gradu- ated tax rate system, it’s not uncommon for Canadians to be taxed at lower tax brackets and rates while living, only to be subject to tax at the top rate in the year of death because of the deemed sale of assets at death. Where assets aren’t transferred to a spouse or common-law partner at death, appreciations in capital (non-registered assets) and the full value of RRSPs and RRIFs can create a large taxable income for the year of death. To avoid this, clients can consider a tax- deferred rollover to a spouse or common-law partner. Or, during retirement, clients can withdraw more than needed from RRSPs and RRIFs and be taxed at lower tax rates, with excess money reinvested in tax-efficient TFSAs or non-registered accounts. Clients employing this strategy should be mindful of income-sensitive benefits like Old Age Secur- ity to avoid clawback. Successful advisors plan ahead for their clients. Whether your clients are young pro- fessionals, middle-aged couples or retirees, discussions about tax, retirement and estate planning can deliver value, uncover opportun- ities and deepen relationships. AE Pros and cons of named beneficiaries on RRSP, RRIF, TFSA and insurance contracts PROS › Avoids estate administration fees (a.k.a. probate, which is as high as 1.7% in Nova Scotia) › Avoids complex estate settlements and related delays › Amending designation when required is simpler than updating a will › Avoids creditors of the deceased’s estate1 CONS › Can create inequitable distributions if RRSP/RRIF taxation at death is charged to and paid by the estate2 › If the beneficiary is a minor or incompetent, proceeds may be paid to the Public Trustee on the bene- ficiary’s behalf › If the beneficiary predeceases the plan owner, a contract designation doesn’t provide for the proceeds to pass to the beneficiary’s children on the owner’s death › Designation is not automatically revoked on marriage or divorce 1 Which is normally the case in the absence of a designation in favour of a spouse or financially dependent child 2 Subject to exceptions tax & estate It can often be more useful to flow assets through the deceased’s estate ADVISOR.CA 17