If the RRIF is not set up this way, there will be immediate tax consequences, and your husband's estate wishes may not play out as intended.
What happens if you are named a beneficiary or successor owner of a RRIF
When a spouse dies, the full amount of their RRIF will be added to other annual income and taxed at the current rate. For example, Shearer, if your husband is in Ontario and has an annual taxable income of $50,000, he will pay about $5,800 in taxes, based on his marginal tax rate.
If he were to die on December 31 of this year, with $300,000 in his RRIF, his net taxable income would be $350,000. And his estate will pay an estimated $148,000 in taxes, again based on his marginal tax rate. An increase of about $142,000, about 50% of the value of his RRIF.
If no beneficiary or successor owner is named in the will or RRIF, the proceeds of the RRIF will pass through that estate and will be subject to estate tax. If there is a beneficiary who is not a qualified survivor, which I will explain later, the RRIF money will pass to them tax-free, and the estate will pay tax.
To help yourself understand that, think about what would have happened if your husband had children from his first marriage. Using the $300,000 RRIF example above, the children would receive their benefit tax-free, and your spouse's estate, and possibly you, would have to come up with the money to pay the tax. If this is your husband's (or yours) second marriage, or one of you wants to divide your assets unequally between beneficiaries, make sure you understand the tax implications of your estate and your surviving spouse.
How to minimize or eliminate the tax consequences of a RRIF owner's death
You can reduce or eliminate income tax from a RRIF upon your death by leaving it to a qualified survivor. An eligible survivor can be:
- Spouse or common-law partner
- A disabled child or grandchild who is financially dependent
- A financially dependent child or grandchild
The first is you, Shearer. Therefore, you will not pay tax on the RRIF, if your husband passes and you pass to him. He owns his RRIF or the money goes into your RRSP or RRIF.
Should you be named as a beneficiary or successor owner in a RRIF?
Canadians can name a spouse as the beneficiary or successor owner of their RRIF. As the heir, Shearer, you have the choice of paying the RRIF into your registered retirement savings plan (RRSP) and/or the RRIF or taking the cash. If you take cash or investments in kind, the RRIF amount will be combined with your husband's other annual income, as explained above.
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