TFSA BENEFICIARY MISTAKES EVERYONE MAKES - YouTube

Hi everyone and welcome back to The Independent Dollar. If you're joining us

for the first time, we make new videos every week on personal finance topics in

a way that is straightforward and easy to understand. Today we're going to be

diving a little deeper into TFSAs, in particular, what happens when the owner

of TFSA account passes away. If you've ever wondered: how does

the tax-free savings account get taxed at death, what happens to your tax-free savings

account when you die, or what is the difference between a beneficiary and a

successor, then this video is for you. Here are the areas that we'll be

focusing on: first what is the difference between a beneficiary and a successor,

what are the TFSA beneficiary rules when you've named both a successor and a

beneficiary on your TFSA, the dangers of naming a beneficiary on your TFSA

especially when you have a Will, how does a tax-free savings account get taxed at

death, why it isn't always tax free and examples of when your beneficiaries pay

taxes on a TFSA, how does a tax-free savings account work when you name your

spouse as a beneficiary instead of naming them as a successor, the tax

consequences and is there anything that they can do at that point.

Since it's inception back in 2009 the tax-free savings account has become a staple and

a retirement and investment strategies. After all, it feels as though we pay so

much in taxes that why wouldn't we take a break when we can get it? If you just

turned 18 this year your limit for 2020 is $6,000, for those of us there were 18

years of age or older in 2009 your limit now looks quite different, sitting at

$69,500. We're not going to go into the

details of TFSA limits today or how the account works, but if you haven't already

I would strongly suggest starting with those videos first so you can see some

basic examples as well as some common misconceptions about the account, so you

can avoid any unexpected penalties from CRA. As your investments grow, it's

important to know that you have control over what happens to your assets when

you die. We often think of a Will when we think of ways to determine who will

inherit our belongings, whether it's our homes, our investments, bank accounts or

maybe even tangible sentimental items that mean so much to us. But what happens

if you die without a Will in Canada? Nominating beneficiaries can be an easy

and quick way to designate your assets to someone should you pass away.

They have both beneficial and as we will see later in this video, sometimes negative

consequences if they aren't used properly. So how do beneficiaries work

and how does a tax-free savings account get taxed at death? Well that depends on how

you've nominated your beneficiaries or a successor, if any. You've probably heard

the term successor and beneficiary used interchangeably, but what is the

difference between a beneficiary and a successor?

If you always thought that the two designations were the same let me start

by being very clear, they're not. This is a common misconception that only shows

its face during the worst of times - when a loved one passes away and they're left

with the unintended taxable consequences. Let's start with the beneficiary designation.

Your TFSA allows you to nominate one or more individuals to

receive the proceeds of your account upon your death. Simply put, if you die

they inherit the money. Any investments within the TFSA are sold and paid to the

people that you've listed on the account, which can be anyone from a spouse to a

cousin to a friend for example. Afterwards your TFSA is then closed.

A common question is: can a TFSA be transferd to a beneficiary? If as a

beneficiary you would like to deposit the amount that you received into your

own TFSA, you can do so providing that you have enough contribution room to

deposit the amount that you inherited. However, you cannot transfer the account

into your own name. A successor holder on the other hand can

only be your spouse, whether through marriage or living common-law. When a

spouse passes away, their living spouse is referred to as a "survivor". Listing your

spouse as a successor on the account is much different than listing them as a

beneficiary. It essentially transfers ownership of

the account to the surviving spouse immediately upon death. Simply put, their

name is now replaced on the account without having to sell any of the

investments within the TFSA. They can then either continue to hold the account

separately as is or they can transfer the entire balance into their own TFSA,

tax-free without triggering any taxable event. This is true regardless

of their current TFSA limit. Therefore, assuming both you and your spouse were

both at your maximum limits for your TFSAs and one of you were to

unfortunately pass, the other would be able to take over your tax-free savings

account without impacting their individual contribution limit, nor would it

trigger any type of taxable event. This is very different from the beneficiary

designation where the assets are sold, removed from the account, and then the

account is closed. Should the beneficiary wish to hold those investments inside of

their own TFSA then they would have to make a deposit into their own account

providing that they have sufficient TFSA room. Exceptions do exist when

the survivor is listed as a beneficiary instead of a successor but even then

there are limitations and they do not receive the same privileges as a

successor designation. Stick around as we will discuss this a little later in the

video when we show you what happens when a spouse dies but they've named their

husband or wife as a beneficiary instead of a successor. What are the TFSA

beneficiary rules when you list both a successor and a beneficiary on your

tax-free savings account? You may not be aware but it is possible

to list both a successor and a beneficiary on your tax-free savings account.

The successor designation though takes precedence over the beneficiary

designation. Therefore, if you listed your spouse as a successor but you also named

your children or friends as beneficiaries, the successor designation

trumps all of them and 100% of the account will be paid to the successor.

However in most cases individuals still tend to use both designations. Why would

they do this? So that in the event the successor has passed, the funds will then

be directed to the surviving beneficiaries and bypass probate. This is

commonly seen with parents nominating their spouse as successors and then

their children as beneficiaries. As we will see shortly in this video,

beneficiary designations bypass the Will. In Ontario as well as some other

provinces with the exception of Quebec, Wills go through a process in Canada

called Probate. Probate essentially verifies the authenticity of a Will and

confirms the most recent wishes of the deceased by ensuring it is a most recent

copy of the Will. While you may not think that your state requires Probate,

ultimately it's not up to us. In fact, many banks in Canada require

proof of Probate before they're willing to release any funds to an executor or a

beneficiary. If your state is under $50,000 there are no estate taxes

during Probate. However estates over that amount are

charged 1.5% on the entire estate and that includes everything from bank

accounts to investments to your home. Naming a beneficiary on your tax-free

savings account though causes it to bypass the Will and therefore the estate

and estate taxes. For a full list of estate tax fees based on your province

you can visit our website TheIndependentDollar.com.

What happens if you die and you have a Will but you've also named a beneficiary

on your tax-free savings account? Naming a beneficiary on a registered account

like a TFSA now removes the TFSA from your estate because a beneficiary

designation causes a TFSA to bypass the Will. Meaning, regardless of what is

written in your Will, whomever you've nominated on your TFSA will inherit the

account. This is important to understand because sometimes throughout our lives

we make changes to our Wills as the individuals we once wish to inherit our

assets are no longer the same people we would like to pass things down to. For

that reason, it's important to review your designations on all of your

accounts on an annual basis so your nominations are always up to date and in

line with your current wishes. A common occurrence of this is a change in spouse

or significant other. If your intention is to leave your TFSA to your spouse or

children, it would cause unintended consequences if you left an outdated

beneficiary on the account to whom you no longer wish to leave your investments to.

As an example, let's assume that you had an ex-girlfriend named Samantha who

was listed as the beneficiary on your account. You and your ex had a falling

out a few years ago and you haven't spoken to each other since. Over that

time you had a Will drawn up though, and listed your brother Tom in the Will as

the beneficiary of your Estate. Unfortunately the TFSA is no longer part

of your estate because a beneficiary is designated on the account, so it bypasses

what's listed in your will. Therefore Samantha is entitled to receive the

entire amount within your TFSA. Your brother Tom whom you've named in your

Will, will received nothing from your tax-free savings account.

If you died, what are the TFSA beneficiary rules? Do your beneficiaries receive the assets

from your TFSA tax-free? Well that depends, any income earned within each

count while you were still alive will be considered tax-free. After you pass away

however, any income earned with the account, unless it's being passed to a

successor, will be considered taxable. So think of the TFSA as now acting similar

to a non-registered account. After the date of death, any

income earned will now be added to the income of your beneficiaries. Continuing

off of our previous example, let's assume that the value of your TFSA when you

passed away was $10,000 but by the time the TFSA was cashed out and paid

to Samantha the value had grown to $10,500. Samantha will

receive $10,000 tax-free and the difference of $500 will

be added to her taxable income. Assuming she has sufficient contribution room

available in her own TFSA, she can now choose to deposit the $10,500

into her own account. How the income will be taxed for Samantha will

depend on the type of investments held within your TFSA. You can learn more

about how income and investments are taxed in Canada by watching our video about

this, which will include a link in the description below. How does a tax-free

savings account work if your spouse passes away but lists you as their

beneficiary instead of listing you as a successor? As a spouse, married or

common-law, you are also referred to as a "survivor" and are entitled to some

benefits when inheriting assets from your spouse. If you are named as a

beneficiary on the TFSA you do have some options. In contrast to other

beneficiaries, you have the ability to transfer the fair market value (FMV) of the

TFSA as of the date of death, tax-free into your own account and not impact

your contribution room. Any amount in excess of that fair market value at

death however will unfortunately be considered taxable income for you. This

is the main difference between being named a successor instead of a

beneficiary, because as a successor all the money within the TFSA account would

have been transferred to you, in your name, tax-free, even amounts earned after

death. As a beneficiary how do you make that tax-free deposit into your own TFSA?

Well first you deposit the money into your account just like any other deposit

but once you've done that, you then need to complete and submit form RC 240:

Designation of an exempt contribution tax-free savings account, and submit

that form to CRA. This must be done within 30 days of that deposit. Here's

what the form looks like and will include a link in the description below.

Hopefully this video is answered some of your questions that you might have had

surrounding TFSAs during a difficult time when a loved one passes away.

As always, comment below with any questions that you might have and feel free to let

us know if there are any other topics that you'd like to learn a little bit

more about. Thank you so much for watching and we'll see you back here next week.