Thursday, February 19, 2009

Tax Free Savings Account (TFSA) and Estate Planning

Tax Free Savings Account (TFSA) and Estate Planning

Death of the TFSA holder - Who can be named as the successor-holder in a TFSA contract?

A TFSA holder can only name a spouse or common-law partner as the successor holder in the TFSA contract. On the death of the TFSA holder, the spouse becomes the new holder of the TFSA investment, maintaining the tax exempt status of the TFSA. This will not affect the TFSA contribution room of the spouse or common law partner. Whether or not a beneficiary can be named in a TFSA contract depends on provincial legislation. As of the date of this writing, Ontario had not passed a legislation regarding the naming of a beneficiary in a TFSA contract. Some of the provinces have already revised their legislation to allow for the designation of a beneficiary. Some TFSA application forms may not be updated until later in 2009, until the provincial legislation have been enacted. If you are not able to designate a beneficiary when opening a TFSA account, check back with your financial institution within a couple of months.

What are the tax rules upon death of the TFSA holder?

Where no successor holder is named for the TFSA, the proceeds of the account will become part of the estate of the deceased. If a surviving spouse/common-law partner receives proceeds from the TFSA, the proceeds can be used to make an exempt contribution to the survivor's TFSA, and not affect the contribution room of the survivor as long as:
  • It is done before the end of the first calendar year following the holder's death (rollover period);
  • And, it is designated as an exempt contribution in the survivor's income tax return for the year the contribution is made.
Where there is no spouse or common-law partner named as the successor holder, the TFSA will not lose its tax-exempt status:
  • Until the the earlier of the time it ceases to exist (completely paid out to beneficiaries);
  • Or, end of first calendar year following the holder's death.

Any payments to beneficiaries, including during this exempt period, will be taxable to the beneficiaries, to the extent that the payment includes income or capital gains earned after the death of the holder. Take note that the income earned within the TFSA after the death of the TFSA holder becomes subject to tax.

TFSA Scenario - Death of TFSA holder

TFSA holder dies with TFSA valued at $90,000. By the time the assets are distributed to the beneficiaries, the value has grown to $92,000. $2,000 will be taxable income to the beneficiaries. The $2000 income was earned after the death of TFSA's holder.

TFSA and Probate

Assets with named beneficiaries such as life insurance policies or RRSPs are excluded in determining the value of an estate for purposes of probate. It is likely that a TFSA with a named successor holder would also be excluded from probate. This is a very good reason for anyone with a spouse/common-law partner to ensure that they name that person as a successor holder when setting up the TFSA.



This article is presented for general information only. Consult your financial advisor for advice regarding your specific financial situation.

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posted by laramaryann @ 3:38 PM

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