When to consider the RRIF successor annuitant option

There are times when leaving an inheritance to a spouse¹ outright may not be the best choice. For example, you may want to make sure that children from a previous marriage receive an appropriate bequest after your spouse passes away. Or you may be faced with a situation in which your spouse is physically or mentally incapacitated or vulnerable.

In these cases, enacting a straightforward strategy called the registered retirement income fund (RRIF) successor annuitant² option allows you to retain greater control over how your RRIF is handled after your death.

How does it work?

When you name your spouse as your RRIF beneficiary, the RRIF can be transferred to your spouse on a tax-deferred basis on your death. With some contracts, your spouse will assume complete control of the RRIF as the successor owner and the contract will continue. This means that your spouse will begin to receive an income stream and be able to exercise rights under the contract, including the rights to change the beneficiaries, adjust the payment stream, or cash in the investments.

When you name your spouse as the successor annuitant, your spouse also assumes control of the RRIF as the successor owner on a tax-deferred basis. However, by designating irrevocable beneficiaries, who aren’t your spouse, you can preserve the tax deferral and give your irrevocable beneficiaries a say in the management of the assets that will ultimately pass to them.

Naming irrevocable beneficiaries effectively restricts your spouse’s ownership rights, and your spouse will need the written permission of the irrevocable beneficiaries to change the beneficiaries, increase the income stream, or cash in the investments. Meanwhile, if the successor annuitant (your spouse) predeceases you or no longer qualifies as your spouse at the time of your death, then the contract terminates and the death benefit will be paid directly to the irrevocable beneficiaries.

These features can make the RRIF successor annuitant option an attractive strategy in certain specific situations outlined in more detail below.

The opportunities

Married with children from a previous marriage

You may want to provide an income stream for your spouse after your death, but at the same time make sure that children from a previous marriage receive any assets remaining in the RRIF on your spouse’s death. Naming your spouse as the successor annuitant and your children as irrevocable beneficiaries means your spouse will receive the periodic payments after your death but will need the kids’ consent to cash in the policy, increase the income stream, or change the beneficiary designations, thereby protecting their residual interest.

Spouse is incompetent

If your spouse is incompetent due to either physical or mental illness, your spouse will be unable to name a beneficiary when assuming ownership of the RRIF. This means that the RRIF would pass through the spouse’s estate and may be subject to probate³ (and the resulting fees, delays, and lack of confidentiality), challenges to the will, and claims by estate creditors. If you name your spouse as the successor annuitant and designate beneficiaries (whether revocable or irrevocable), you can make sure that on your spouse’s death, those funds will flow outside the estate and pass directly to the named beneficiaries.

Protecting your spouse

Perhaps you’re concerned that your spouse may cash in the entire policy and, as a result, fall short in meeting future living expenses. Alternatively, you may worry that your spouse will be a victim of fraud or coercion resulting in the misuse of their funds to their detriment.

Naming your spouse as the successor annuitant and designating irrevocable beneficiaries means that the irrevocable beneficiaries would have to authorize any withdrawals or changes in payments. The irrevocable beneficiaries can make sure that the income stream changes to match your spouse’s needs and that the investments aren’t cashed in and spent.

Caveats

You must be sure that you won’t want to change the irrevocable beneficiaries. Once named, the requirement for their consent to make changes to the RRIF contract applies immediately and restricts you, as the owner, as well as any successor owner, such as your spouse. For example, their approval is needed if you want to increase the income stream during your lifetime.

Furthermore, don’t name minors as irrevocable beneficiaries as they’re unable to give consent until attaining the age of majority, resulting in the contract being essentially frozen until that time.

As with any RRIF, on the death of the surviving spouse, a tax liability will be created in the spouse’s estate. Depending on the amount of payments received by your spouse before death, the tax liability of the estate may be disproportionate to the benefit received by your spouse and no funds flow to your spouse’s estate. If it’s not your intention to have your spouse’s estate pay these taxes, planning such as using life insurance or naming the spouse’s estate as a partial beneficiary should be considered. In both cases, you can estimate the future tax liability and have this amount covered by either life insurance or the proportion of the RRIF designated to the spouse’s estate as beneficiary.

Note: For RRIF contracts held in nominee name or on book, naming a successor annuitant may not be available and must be verified with the particular dealer.⁴ When a spouse is named successor annuitant on any locked-in RRIF, they can choose the death benefit and would need to name their own beneficiary. Also, it’s not possible to name an irrevocable beneficiary with nominee name contracts or on all locked-in RRIFs, whether held in client name or nominee name.

Ideal candidates

• You want to provide income for your surviving spouse during the spouse’s lifetime but give the remaining assets to your children.
• Your spouse is or may become incompetent due to mental or physical illness.
• You have concerns that your spouse may cash in the entire investment and fall short in meeting future expenses.

Take action

• Designate your spouse as the successor annuitant.
• Designate beneficiaries, either revocably or irrevocably, where appropriate.

This strategy is free and the paperwork is easy, but everything must be completed in the correct order.

Your advisor can help you decide if the RRIF 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 The successor annuitant must be the spouse or common-law partner, as defined by the Income Tax Act (Canada), of the annuitant. Only one person can be named as the successor annuitant. Refer to the applicable information folder, contract, and Fund Facts. 3 In Quebec, the probate process and probate fees (which are minimal) only apply to non-notarial wills. 4 Naming a successor annuitant may not be supported by dealers or may have additional restrictions or limitations.