Transferring a deceased spouse’s RRSP balance into your own can impact what your loved ones receive on your own death. Let’s fix that.
As you know I’m a conservative investor; I believe one of the foundations of any personal or family investment plan is an RRSP.
From practically the day we married until she passed, my late wife Mary and I diligently put every dime possible into individual RRSPs. When she died, the Canadian Revenue Agency (CRA) allowed me to transfer Mary’s RRSP, tax-free, into my own.
Today, that leaves me with a sizeable RRSP balance – which puts me in a comfortable financial situation but, like so much involving Mary’s death and the pursuant financials, has a tinge and sadness and guilt.
The comforting thing is, thanks to Mary, I have a financial buffer I may never use up in my lifetime. Together we agreed to postpone today’s spending for future security. I’m good.
Which leads back to the sadness and guilt. Our frugal ways during her lifetime meant Mary undoubtedly sacrificed some of the better things of life in order to invest in, for her, a day that wouldn’t come.
As the survivor, I put inordinate thought into what to do with that money we saved together. I discussed “life insurance guilt” in a previous blog; that feeling exists here as well. I felt awful thinking about using that money for myself, versus the long retirement together we planned.
In my blog about “life insurance guilt”, I talked about how to deal with the guilt and grief of financially benefitting from a spouse’s death – and how I finally understood that Mary would want (or knowing her, demand!) I use the money as I see fit. She’d trust me.
MARY’S VOICE SAID, “USE THAT MONEY WISELY”. SO, I DID.
I decided to use the RRSP to achieve three objectives:
- Keep the money conservatively invested (because that’s who I am)
- Use what I need to live a comfortable life (because that’s what Mary would want)
- Offset the tax paid on my own passing by buying a life insurance policy (because that’s a prudent thing to do – and I’ll tell you why):
As in my situation, when the first spouse of a married couple dies, the deceased spouse’s RRSP/RRIF balance may be transferred – on a tax-free basis – to the surviving spouse’s RRSP/RRIF. This is what that looks like:
| Prior to Mary’s death | Mary’s $500,000 RRSP + Richard’s $500,000 RRSP = $1,000,000 |
| After Mary’s death | Richard’s post-transfer RRSP = $1,000,000 |
This sets up a dual problem: Because I’m widowed, while I’m alive I can’t pension-split my RRSP withdrawals with my spouse. What’s more, when I die the entire remaining RRSP/RRIP balance is included in my final year’s tax return. I’m seeing myself pushed into the highest tax bracket.
Fast forward to the future. Now I’m dead. Any tax on the remaining RRSP/RRIF balance post-transfer (assuming there is some) is due on the death of the second spouse. Let’s assume my balance remains at that level when I die (these are made-up numbers, by the way):
| At Richard’s death | Richard’s final RRSP balance = $1,000,000 |
| 50% marginal tax rate | Tax due on Richard’s passing = $500,000 |
Wow, half a million dollars – that’s a huge cheque for my estate to write to CRA. And I’d rather see my kids and their kids get that money.
So how do I minimize this tax on my estate? Life insurance might just be the answer.
DON’T BELIEVE IN LIFE INSURANCE? LET ME TALK YOU OUT OF THAT.
I’ve been a financial advisor for 25+ years and, when the conversation turns to life insurance, people have… opinions. People say, “I don’t believe in insurance!”, to which I reply, “Insurance isn’t a religion.” I’ve heard, “I’ll self-insure” and my only answer is, “So you have enough money saved up if you die tomorrow?”
I’ve heard more, but I like to keep this blog family-friendly.
When I discuss the tax due on a second death, I’ll often get, “The kids will inherit whatever’s left after the taxes are paid. If that’s zero, that’s what they get.” But do you really want to do that to your kids?
I wouldn’t. Mary wouldn’t.
We worked hard to become financially independent, and I see it as my responsibility to minimize the tax impact on my estate – and its beneficiaries.
Now let’s look at how life insurance can work to mitigate taxes:
As shown earlier, let’s assume that when I die, the tax liability from my RRSP/RRIF is $500,000. Let’s also assume I’ve taken out a 25-year term policy for $500,000, at $500 per month.
Final assumption: I’m going to die in 22 years, or when I’m 82. (Again, for demonstration purposes only.) I’ll use the actuarial tables as my guide.
- I’m now 60 years old – and estimating I’ll live until 82
- The cost of the policy over 22 years is $132,000 ($500 x 12 months x 22 years)
- If I don’t buy life insurance, my estate receives $500,000 after tax
- If I DO buy this policy, my estate receives $868,000
$1,000,000 balance
– $500,000 tax
– $132,000 premiums
+ $500,000 life insurance
= $868,000 to my kids
Or, in simplest terms:
- NO insurance: Estate = $500,000
- WITH insurance: Estate = $868,000
My estate (only considering my RRSP) is larger by a massive $368,000 because the insurance payout replenishes the portion lost to taxes.
SO, IS THERE A CATCH? SHORT ANSWER: “NO”
There must be a catch, right? Not that I can see. I’m 60 years young and in good health, so my life insurance premiums are still relatively inexpensive. So, I can only advise that you buy insurance sooner than later, and keep fit.
But the biggest advantage is that life insurance death benefits are tax-free. The only drawback is that $6,000 worth of lifestyle expenses each year go to pay the premiums. To me, that’s a small price to pay.
I know life insurance isn’t for everybody (did I mention my non-family-friendly client conversations?), but I see it as the perfect way to replenish some if not all of the hole taxes incur on an RRSP/RRIF balance when a second spouse dies.
If you’re wondering how much your assets might be taxed on second death, or are looking for other ways to ensure your loved ones receive as much of an inheritance as possible, give me a call. I’ll personally work with you to help you replenish your estate.
This one simple move can help see that a widow or widower can live a rich retirement while looking out for their kids as well.
We owe that much to our late spouses.
The process of finding a financial advisor can be overwhelming. It is our job to make that process simpler and easier.
Dri Financial Group’s proprietary Wealth Navigator Process is designed with you in mind.
Its structured framework helps you make an informed decision and feel confident in our team and management practices before we get started.
We offer you a range of services from creating bespoke financial plans and providing investment advice to helping you take advantage of our investment models. If you would like more information on the Wealth Navigator Process or our team, call me any time at 416.355.6370 or email me at richard.dri@scotiawealth.com.
—
Beyond helping you manage your finances, we take pride in motivating, educating and helping you expand your financial literacy. We are here to answer any questions you have and to help you feel in control of your financial destiny.
If you are ready to dive deeper into your financial literacy journey, we have a wide range of free tools and educational resources available.
-
- Subscribe to our Never Retire Newsletter
- Contact us to order a complimentary e-book
- Check-out our latest Wealth Navigator Podcast
- Follow me on LinkedIn
source https://richarddri.ca/how-can-a-widow-reduce-tax-impact-on-their-estate/
Dri Financial Group 