If the RRIF is not set up this way, there will be immediate tax consequences, and the estate wishes of your husband may not play out as intended.
What happens if you’re not named the beneficiary or successor owner of a RRIF
When a partner dies, the full amount of their RRIF will be added to their other income for the year and taxed at the current rate. For example, Shearer, if your husband is in Ontario and has an annual taxable income of $50,000, he would pay about $5,800 in tax, based on his marginal tax rate.
If were to die on December 31 of this year, with $300,000 in his RRIF, his total taxable income will be $350,000. And his estate would pay about $148,000 in tax, again based on his marginal tax rate. An increase of approximately $142,000, almost 50% of the value of his RRIF.
If no beneficiary or successor owner is named within the will nor RRIF documents, the RRIF proceeds will pass through the estate and will be subject to estate administration tax. If there’s a beneficiary who’s not a qualifying survivor, which I will explain later, the RRIF proceeds will pass to them tax-free, and the estate will pay the tax.
To help yourself understand that, think about what would happen if your husband has children from a first marriage. Using the $300,000 RRIF example above, the children would receive its proceeds tax-free, and your husband’s estate, possibly you, must come up with the money to pay the tax. If this is your husband’s second marriage (or yours), or either of you want to divide your assets unequally amongst your beneficiaries, make sure you understand the tax consequences you are putting on the estate and your surviving partner.
How to reduce or eliminate the tax consequences on the death of a RRIF holder
You can reduce or eliminate the tax on income from a RRIF upon your death by leaving it to a qualifying survivor. A qualifying survivor can be a:
- Spouse or common-law partner
- Financially dependent infirm child or grandchild
- Financially dependent child or grandchild
The first one is you, Shearer. So, you’re not going to pay tax on the RRIF, if your husband passes and you succeed him. You become the owner of his RRIF or the money goes into your RRSP or RRIF.
Should you be named a beneficiary or successor owner on a RRIF?
Canadians can name a spouse as either the beneficiary or successor owner of their RRIF. As a beneficiary, Shearer, you have the choice of either paying out the RRIF to your registered retirement savings plan (RRSP) and/or RRIF or taking the cash. If you take the cash or investments in kind, the RRIF value will be included with your husband’s other income for the year, as described above.