What Happens to Your RRIF When You Die?

A Registered Retirement Income Fund (RRIF) is a tax-deferred retirement savings plan that provides a steady income stream from accumulated retirement savings. RRSPs must be converted to RRIFs by the end of the year the holder turns 71. Once converted, the holder must make minimum annual withdrawals based on a percentage of the account balance, and these withdrawals are taxed as regular income.

RRIF accounts offer flexibility in generating retirement income, as the holder can withdraw more than the minimum amount if desired. The assets in the RRIF account continue to grow tax-deferred until withdrawn. RRIFs can also hold a variety of investment products, including mutual funds, stocks, bonds, and guaranteed investment certificates (GICs).

As these accounts can hold significant wealth, understanding what happens to your RRIF when you die is a critical component of responsible estate planning.

Where Does Your RRIF Go At Death? The Default Rule

When the original holder of a RRIF passes away, the Canada Revenue Agency (CRA) has a default rule: the entire fair market value (FMV) of the RRIF at the time of death is considered to have been received by the deceased just before death. This amount then becomes taxable income on their final tax return. This can result in a substantial tax liability, especially if the RRIF holds a large balance, potentially pushing the final income into the highest tax bracket.

However, the deceased can implement specific estate planning strategies to alter this default tax treatment, including:

• Naming their spouse or common-law partner as the successor annuitant.
• Designating a financially dependent child/grandchild as the beneficiary.
• Naming their spouse or common-law partner as the beneficiary.

Absent these exceptions, the value of the RRIF flows through the estate, triggers income taxes, and is subject to probate and estate administration fees before distribution to heirs. Let’s explore the successor annuitant and beneficiary options in more detail.

Successor Annuitant vs Beneficiary for a RRIF

There are two primary mechanisms for transferring RRIF assets: naming a successor annuitant or designating a beneficiary.

	Successor Annuitant	Beneficiary
Eligibility	Spouse/common-law partner only	Any designated person/entity
Account status	Continue to exist	Account paid out and closed
Tax Treatment at Death	Deferred	Ongoing RRIF income reported by the survivor
Probate	Bypasses estate	Bypasses estate (there are exceptions)
Simplicity	Very simple	Involve more steps

Successor Annuitant

A successor annuitant can only be your spouse or common-law partner. Upon your death, they simply take over the RRIF account. The account continues to exist, and they become the new annuitant. This is often the most seamless option for transferring RRIF assets.

There is no immediate tax consequence. The value of the RRIF is not included in the deceased’s final income tax return. The successor annuitant will be taxed on withdrawals made from the RRIF going forward, just as the original annuitant was.

This option provides continuity, avoids probate, and defers the tax liability until the surviving spouse withdraws the funds.

Designating a Beneficiary

A beneficiary can be any person or entity, including your spouse, children, a friend, or a charity. When you die, the RRIF is collapsed, and the assets are paid out to the named beneficiary. The tax treatment will depend entirely on who the beneficiary is, which will be detailed in the next section.

In summary, successor annuitant status is limited to a spouse but provides continuity of the original RRIF account, while being named beneficiary opens up options but leads to account closure.

Tax Implications for Different Beneficiary Scenarios

The tax implications can vary substantially depending on who is named as the RRIF successor annuitant or beneficiary. Let’s examine 5 key scenarios:

Spouse as Beneficiary

If a spouse or common-law partner is named as the beneficiary (instead of a successor annuitant), they have the option to roll over the funds tax-deferred into their own registered plan (like RRSP or another RRIF).

By performing the rollover, the spouse receives a deduction to offset the income inclusion, effectively deferring the tax. Any funds not rolled over are taxable. The minimum RRIF withdrawal for the year of death is taxable to the deceased’s estate.

Dependent Child or Grandchild as Beneficiary

Naming a financially dependent minor or infirm child/grandchild as the RRIF beneficiary can potentially allow them to receive the funds on a tax-deferred basis.

• Minor Child/Grandchild (Under 18): The proceeds can be used to purchase an eligible annuity, with the payments being taxed in the child’s hands as they are received. Given the child’s likely low income, this can minimize the overall tax paid.
• Infirm Child/Grandchild (Any Age): If a child or grandchild was dependent on you due to a physical or mental infirmity, the RRIF proceeds can be rolled over to their own RRSP, RRIF, or a Registered Disability Savings Plan (RDSP).

In this scenario, the deceased’s estate does NOT pay tax on the RRIF assets. The funds pass directly to the beneficiary outside of the probate process. Any future taxes owed depend on how the beneficiary utilizes the inherited funds.

Adult, Non-Dependent Child or Other Individuals as Beneficiary

If someone other than a spouse or financially dependent individual – such as an adult child, family member, or friend – is named as an RRIF beneficiary, the tax implications look like this:

• The named beneficiary receives the full RRIF proceeds directly, and this payment is tax-free.
• However, the full value of the RRIF is included as income on the deceased’s final tax return, and the resulting tax is payable by the estate.

Important note: If the estate has insufficient funds to cover this tax liability, the CRA can legally seek payment from the beneficiary up to the amount they received from the RRIF.

What Happens if No RRIF Beneficiary is Designated?

If the RRIF owner dies without designating any successor annuitant or beneficiary, the least tax-efficient outcome occurs:

• The full market value of the RRIF is taxed at the deceased’s final tax return marginal rate, which could result in a large tax bill, especially if the RRIF balance is substantial.
• The RRIF assets become part of the estate and are subject to probate fees, which are taxes levied by the province or territory on the value of the estate’s assets. This reduces the amount available to heirs.
• The after-tax proceeds are distributed according to the instructions in the will, which can be a lengthy process.
• The surviving spouse may still be able to receive RRIF assets per the will instructions. However, they lose the ability to roll over funds proactively into their own tax-deferred RRSP or RRIF account.
• Outdated beneficiary designations could result in assets being distributed to unintended or former heirs, contrary to the will.

Overall, failing to plan RRIF beneficiary or successor annuitant designations can lead to unintended taxes, delays, fees, paperwork, and potential conflicts for heirs.

Strategies to Minimize Taxes on Your RRIF at Death

While everyone’s financial and family situation is unique, here are 7 of the most effective strategies to employ with RRIF accounts to minimize tax consequences at death:

• Name a successor annuitant – If you have a spouse or common-law partner, this is often the simplest and most effective strategy for a seamless, tax-deferred transfer.
• Designate a qualifying beneficiary – Naming a spouse or a financially dependent child/grandchild as a beneficiary allows for a tax-deferred rollover.
• Convert some RRIF to a life annuity – Annuity payments end at death, so only the remaining RRIF value is taxed on the final return.
• Strategic withdrawals – If you are in a lower tax bracket in your retirement years, consider withdrawing more than the minimum from your RRIF. While you pay tax on these withdrawals, it may be at a lower rate than the tax your estate would pay on a large RRIF balance at death.
• Donate to charity as a beneficiary – Designating a registered charity as the beneficiary can create a significant tax advantage. The RRIF proceeds are paid directly to the charity, and your estate will receive a donation tax credit that can be used to offset the tax liability from the RRIF income inclusion, potentially eliminating the tax bill.

Key Takeaways on RRIF Death Benefits

Here are the key considerations when planning for RRIF accounts:

• Without a proper designation, your RRIF assets flow through probate and will be fully taxed as income in your final year.
• Naming a successor annuitant or beneficiary is the most effective tool to manage the tax and probate implications of your RRIF.
• A successor annuitant takes over the RRIF, while a beneficiary receives a payout.
• Be aware of how your province’s laws, especially in Quebec, affect your planning.
• Beneficiaries other than a spouse receive funds tax-free, but the estate pays taxes.
• Review your beneficiary designations every few years and after major life events like marriage, divorce, or the birth of a child to ensure they still reflect your wishes.

Properly planning for what happens to your RRIF is a final, powerful act of financial care for your family. Consulting with a financial advisor and a legal professional specializing in estate planning is highly recommended to ensure your RRIF designations align with your overall estate goals.

FAQs about What Happens to Your RRIF When You Die

Article Sources

• RRIFs and tax rules upon death – sunlife.ca
• Death of a RRIF annuitant – canada.ca