Say that the holder of a Registered Retirement Savings Plan (RRSP) names their spouse as the beneficiary. Later, the couple divorces. The RRSP holder removes their ex-spouse from their will. However, with all the activity surrounding the divorce, they neglect to change the RRSP beneficiary designation from their ex-spouse to their child.
If the RRSP holder passes away before converting the plan to a Registered Retirement Income Fund (RRIF), the RRSP assets could go to the ex-spouse. It gets worse. The tax liability on the RRSP assets, equal to about half their value, must be paid by the estate, leaving even less for the child.
This scenario shows the need to ensure your beneficiary designations are all up to date.
Keep a beneficiary record
To begin, it’s helpful to keep an online or paper record of beneficiaries that you specified in your will and designated for all relevant financial vehicles. These may include an RRSP, RRIF, Tax-Free Savings Account (TFSA), Registered Education Savings Plan (RESP), life insurance policy or segregated fund.
Note that for registered plans, the beneficiary can be designated on the registered plan documentation in provinces other than Quebec. Residents of Quebec name their legatee (beneficiary) for each registered account in their will, not on the account form—with one exception. A legatee can be named on the form when the investment is an eligible insurance product, such as a segregated fund.
When to make a change
The most common reason to add or change a beneficiary is when you or someone in your family has a significant change in their life. Events or situations could be marriage, divorce, birth or adoption of a child, or the passing of a loved one. For example, someone remarries and names their new spouse as the beneficiary of their RRSP. Or an individual has a new grandchild and updates their will to add the grandchild as a beneficiary, also establishing a trust. Ideally, you update your beneficiary designations when the event arises. However, reviewing your choices from time to time allows you to catch any changes you may have overlooked.
Also, changes in your or a beneficiary’s financial situation or updates to your estate plan can call for a beneficiary review. Maybe a parent designated both children as beneficiaries of a vacation property, but recently one child moved out of the province—so there’s a decision to make. Or perhaps a retiree has a permanent life insurance policy no longer needed to protect the family, so they change the beneficiary from their spouse to a charity.
Changes to beneficiaries may be needed for a variety of reasons, including ones that are unique to your situation. Be sure to keep a record of your beneficiaries, and don’t wait too long before conducting a review.