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How To Gift A Registered Account Strategically

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Three ways to minimize taxes on an estate

Many Canadians with registered accounts such as RRSPs, RIFFs and TFSAs decide to name their spouse as the beneficiary. While this is a common provision, it’s good to remember that the surviving spouse must pay taxes on all remaining amounts in the registered accounts upon their partner’s passing, which can be an unwelcome surprise. The good news is that donors have options. Here are three strategies to make the most of the residual capital in a registered account after death.

1. Estate as the beneficiary

One option to minimize the taxes for the estate and extend a donor’s legacy of charitable giving is to leave the residual capital in their registered accounts to charity. There are different ways to achieve this, one of which is to name the donor’s estate as the beneficiary of the remaining capital in their registered accounts and include a specific charitable bequest in the donor’s will.

One thing to note about bequests however, is that they are subject to normal issue of the estate process—meaning creditors, legal, executor and administration costs, tax liabilities, succession laws, and claims against the estate by family members may add to the process time and may reduce the gift amount to the charity the donor is aiming to support. As well, charitable bequests may be subject to probate along with the rest of the estate, making the gift a matter of public record. In short, this option can get complicated.

2. Charitable organization as the beneficiary

A second strategy to minimize taxes on an estate is to name one or more charities as the beneficiary of the residual balance of the donor’s registered account before their passing. There is often a limit to the number of beneficiaries that can be named but the residual capital flows directly to the named charity, by-passing the donor’s estate and avoiding the estate-related issues mentioned above.

3. Gifting a registered account using a Donor Advised Fund

A third strategy that avoids a donor’s charitable gift being subject to probate and other estate issues while receiving income from their registered accounts for life, is to place the residual capital in a Donor Advised Fund (DAF). By naming Gift Funds Canada as the designated beneficiary, and once the residual amount has been received by Gift Funds Canada, donation receipts will be issued, offsetting any taxes payable on the proceeds of the registered accounts.

The donor retains the ability to update their recommendations for how the funds are distributed and can make changes to those intentions at any time during the donor’s life. While there is limited ability to name multiple beneficiaries on registered accounts, a Donor Advised Fund offers donors the opportunity and flexibility to direct charitable grants to an unlimited number of charities over time. It’s a strategic way to create a lasting philanthropic legacy for generations to come.

Gifting a registered account to a Donor Advised Fund during the donor’s lifetime

In some cases, a donor may not require the income from their registered account and may consider gifting the capital to a Donor Advised Fund during their lifetime. In this case, the donor can choose their preferred asset manager and make grant recommendations to qualified organizations for the fund’s assets. A donation receipt would be issued at the time of making the donation to their DAF, which would be applied to reduce the tax liability resulting from cashing out their registered account, such as an RRSP or RRIF.

Another strategy for donor’s wishing to gift their registered account assets during their lifetime and who have appreciated securities, may choose to donate the appreciated securities to charity while withdrawing an equal amount of cash from their RRSP or RRIF. The benefit to the donor in this case is that the capital gains tax liability on the gifted securities is eliminated and the resulting donation receipt for the fair market value of the donated securities will fully offset the tax liability attributed to funds withdrawn from the registered account. It’s a smart option when donor’s wish to gift a registered account in their lifetime.

Looking for more information about Donor Advised Funds? Find out Why Financial Advisors are Looking to Donor Advised Funds.