RRSP segregated fund contracts—naming a successor annuitant

Wealth Transfer Strategy 11
Naming a spouse¹ as a beneficiary of your registered retirement savings plan (RRSP) can be a simple and cost-effective way to pass on your RRSP at death. With an RRSP segregated fund contract, these benefits can be enhanced by naming your spouse as a successor annuitant on the contract. By using this option, you can keep the current estate planning benefits already available with a beneficiary designation while adding more flexibility and choice for your spouse after your death.
For RRSP accounts that don’t hold insurance investments like segregated fund contracts do, the successor annuitant option isn’t available. In these cases, only a beneficiary designation² can be made. Anyone can be designated as a beneficiary of an RRSP.
A segregated fund contract may offer the additional option of naming a successor annuitant, but it can only be a spouse. This option is available in segregated fund contracts without income guarantees. Understanding how it works and the opportunities it presents versus a beneficiary designation can help you determine if it’s right for you.
How it works
A successor annuitant designation in an RRSP is put in place when the owner/annuitant names a spouse as the successor annuitant and sole primary beneficiary of the contract. If the owner dies first while the contract is still an RRSP, the spouse has 30 days to choose between taking the lump sum death benefit or continuing the contractual benefits in a new RRSP or registered retirement income fund (RRIF) contract in the spouse’s own name. If a decision isn’t made within the 30 days, the death benefit, which would include any applicable top-up payments, will be paid to the spouse—this is the default option. The total cash value can be rolled over to the spouse’s own RRSP or RRIF on a tax-deferred basis and invested accordingly.
If the spouse chooses to continue the contractual benefits, the market value needs to be transferred to a new RRSP or RRIF contract in the spouse’s own name and beneficiaries need to be designated. Regardless of the spouse’s choice (death benefit or continuation of contractual benefits), the subsequent contribution or transfer to the new RRSP or RRIF preserves the tax benefits of the rollover.
Naming a successor annuitant is available for segregated fund contracts held in a locked-in RRSP (LRSP) or locked-in retirement account (LIRA). However, a successor annuitant isn’t available for RRSP, LRSP, and LIRA accounts in nominee name.
The opportunities
When a spouse is named as a beneficiary in a registered plan, such as an RRSP, there are two main advantages when the account owner passes away. First, the transition of the proceeds from that account to the spouse happens directly, avoiding the owner’s estate. The benefits from this include decreased estate administration and probate fees, where applicable, avoiding potential delays—especially if there’s litigation, exposure to estate creditors, or lack of privacy. Second, when a spouse transfers the proceeds directly to a new RRSP or RRIF in the spouse’s own name, income tax is deferred, potentially saving the deceased’s estate thousands of dollars.
By using the RRSP successor annuitant strategy, you can add more flexibility to your estate plan by giving your spouse the option to continue your current contract terms or make a different investment. If your contract has unique features or benefits, this can allow your spouse to preserve them, even though they may not be available for purchase in a new contract.
Compare the options
Benefits for wealth transfer of RRSP |
Spouse is designated as beneficiary |
Spouse is designated as successor annuitant |
---|---|---|
Bypass estate |
✔ |
✔ |
Tax-deferred spousal rollover |
✔ |
✔ |
Death benefit available |
✔ |
✔ |
Contract terms continue |
✖ |
✔ |
Ideal candidates
- You have considered or are considering investing in a segregated fund contract in your RRSP.
- You want to take advantage of a direct transfer to your spouse outside your estate and the tax deferral offered by the spousal rollover.
- You want to provide your spouse with the flexibility to continue your current contractual benefits or put the death benefit in an investment of your spouse’s choice.
Take action
- Designate your spouse as the successor annuitant and sole beneficiary.
- Name secondary beneficiaries in case your spouse pre-deceases you.
This strategy is free and setting it up is easy, but everything must be completed in the correct order.
Your advisor can help you decide if the RRSP successor annuitant option is right for you.
1 This includes a spouse or common-law partner as defined by the Income Tax Act (Canada). 2 In Quebec, you can only name a beneficiary on an RRSP contract if it’s an insurance product like a segregated fund. Non-insurance investments in RRSPs, such as mutual funds, don’t allow a beneficiary designation.
Important disclosure
Any amount that is allocated to a segregated fund is invested at the risk of the contract holder and may increase or decrease in value.
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