If you are the executor of an estate, or you are perhaps advising your client on his will, you should be aware of the rules regarding RRSP’s and RRIF’s on death.
I’m surprised at the number of people, executors and plan administrators alike, who work on the often erroneous assumption that these plans simply roll over tax-free when the surviving spouse is named as the beneficiary.
In fact, the opposite is true. While capital property automatically rolls over tax-free to a spouse on death, a RRSP/RRIF does not. The general rule is that it is taxable in the hands of the deceased annuitant. From there, a number of possibilities can occur.
If the spouse is named as the “successor annuitant”, then the capital in the plan is not paid out. The plan simply continues and the spouse replaces the deceased as the annuitant. There is no tax to the estate and no reporting is required. The successor annuitant can be named in the plan itself or in the will. The successor annuitant can also be established in other cases if the executor and the plan administrator agree.
If there is no successor annuitant, then the proceeds of the plan are realized and they are taxed either in the hands of the surviving spouse or the estate, depending on the circumstances. If the spouse is designated as the plan beneficiary in the contract, the payment of funds is made to the spouse upon death of the annuitant, and the spouse adds the amount to income. The spouse then has until 60 days after the end of the year to transfer the funds to his or her own RRSP/RRIF to obtain an offsetting deduction.
If the spouse is named as a beneficiary in the will alone (which will likely be the case in Quebec), then the payment of funds is made to the estate. The executor and the spouse must then agree and file an election (form T2019 for RRSP’s or T1090 for RRIF’s) to have the proceeds added to the spouse’s income, and be eligible for rollover into his or her plan.
What if the spouse refuses to sign the election?
Take the case where a deceased man is survived by his second wife, has children from a former marriage and the leaves a RRIF to the spouse in the will, with no clear instructions regarding the taxes. The residue from the estate goes to the children. The executor must receive the funds from the RRIF and pay them to the spouse under the terms of the will. No taxes are deducted from this amount. The spouse can then choose not to make the election. She will receive the entire amount of untaxed capital from the RRIF and she will not have to roll it into her own plan, thus avoiding future taxes on withdrawal. The taxes will be borne by the deceased, and be taken from the residue of the estate, thus providing a possible unintended benefit to the spouse, and most likely some very disgruntled children.