How Beneficiary Designations Work

Posted 08 May 2018 by Rick Irwin, CFP, CLU

Opening an investment account involves a fair bit of paperwork. Depending on the account type, part of this may include the naming of beneficiaries. Often this is done without enough thought and isn’t always revisited as it should be when family circumstances change.

Here’s a brief summary of the various plan types and options for the transition of assets on death to help navigate through this sometimes oversimplified area of tax planning.


For a Registered Retirement Savings Plan (RRSP), you can choose to name a beneficiary to receive the funds upon your death. If this named beneficiary is a spouse, common law partner or a financially dependent and disabled child or grandchild, the money will be transferred tax free to that individual. When anyone else is named as beneficiary, the money will be paid to the named beneficiary with taxes. In this case, naming a beneficiary has no tax benefits but it may allow the RRSP assets to avoid probate, which can be a costly and lengthy process. In some situations, however, it may be preferable to have the estate named as the beneficiary so that before any beneficiaries receive money, the tax bill and any other estate expenses are taken care of.


For a Registered Retirement Income Fund (RRIF), there are two options to choose for survivorship; naming a beneficiary or naming a successor owner. Only a spouse or common law partner can be named “successor owner.” The distinction here is that the investments are transferred “in kind” (as is) to the surviving spouse who continues to receive the RRIF payments in place of the deceased. A beneficiary, on the other hand, receives the proceeds of the RRIF account once it’s sold and the estate is liable for the income tax. An exception is if a spouse is named as the beneficiary as this, too, is a tax-free transfer but still requires that the assets in the RRIF be sold and reinvested.


The Tax-Free Savings Account (TFSA), the relative new kid on the block, also has two options upon death of the contract owner; naming a beneficiary or successor owner. Again, only a spouse or common law partner can be named “successor owner.” If this option is chosen, on the death of the owner, the survivor receives their TFSA investments “in kind” and the plan retains its tax-free status. A beneficiary receives the proceeds of the TFSA, and no tax is payable until the date of death of the plan owner, but the funds are no longer tax free and tax is payable from the date of death. A named beneficiary also receives the funds tax free, except for any gains from the date of death to the date the TFSA investment is paid out. The only way the funds could continue to be invested in a tax-free manner is if the recipient had sufficient TFSA room available. 

Non-Registered accounts

TFSAs, RRIFs, and RRSPs are registered accounts, meaning they are special contracts under the Income Tax act that provide for tax-deferred growth (and in the case of the TFSA, totally tax-free growth). All other investments are called non-registered and aren’t tax-sheltered, which means that you pay annually on any interest, dividends or capital gains generated by the investments. By default, these contracts don’t have a provision to name beneficiaries. However, in the case of a spouse, common law partner or adult child who helped contribute to the plan, these assets can be jointly owned, meaning upon the death of one owner, the survivor becomes the sole owner. On the death of the last plan owner, non-registered assets will be paid into the estate bank account, which is subject to probate. Probate fees vary from province to province. In Nova Scotia it is 1.695 per cent of the value of the estate, so for larger estates this can involve a fairly sizable amount of money; though often it’s more about avoiding the administrative burden that comes with having to probate an estate than the cost savings.

Segregated funds/GIOs

While normally non-registered contracts don’t allow the naming of beneficiaries (such as the case with accounts invested in mutual funds and GICs), other investment types available through insurance companies like segregated fund policies and Guaranteed Interest Options (GIOs) do allow naming beneficiaries and potential creditor protection. These investment options work similarly to mutual funds and GICs but allow for bypass of probate as well as potential creditor protection. In many situations, holding non-registered assets with an insurance company can offer significant advantages in terms of estate administration.

Where there’s a will there’s a way

Once non-registered funds (or registered accounts with “estate” named as beneficiary) pay into the estate bank account of the deceased, the executor follows the terms of the will, which would include a provision for paying any income taxes due, any charitable bequests as well as taking care of other estate costs such as probate, legal and accounting fees and burial costs. Once this is done, the remaining money will be paid out as per the terms of the will. This is the only case where the will dictates where funds are to be paid. Any account that has the provision for the naming of a beneficiary, and where that provision has been exercised, won’t be paid into the estate bank account. This means the allocations in the will, unless they specifically refer to the registered plan, don’t apply. In some cases, it may be preferable to have the funds paid into the estate account rather than directly to a named beneficiary. A will is a sophisticated planning document that allows for many contingency plans, such as who to leave the funds to if a person you would have named as beneficiary pre-deceased you or died in a common accident or for ensuring that funds are put in a trust to pay your children at some point in the future. By comparison, a named beneficiary is a blunt instrument, and while it can be easily changed in some cases, it may not be the best choice when you want to leave the money “with strings attached” or do contingency planning. For this reason, we strongly recommend you consult with a lawyer when estate planning.

In Trusts We Trust

Another device that can work in conjunction with a will for your estate planning would be the establishment of a form of Trust known as “Inter Vivos,” which is a fancy name for a Trust that’s set up during your lifetime as opposed to after your death. If you’re over the age of 65, income tax legislation dictates you may roll investments into this form of Trust (a joint partner for married couples or an alter ego trust for single individuals) tax-free, meaning you don’t have to pay capital gains taxes on the disposition of those funds. If you’re under 65, however, there’s no ability for a tax-deferred roll over of investments. A trust may work well in conjunction with your will as it has the same planning power and poses an alternative means of distributing your wealth upon death, including bypassing probate.

Hopefully this has summarized the survivorship choices with the various investment account types and situations where naming a beneficiary, or successor owner, or perhaps letting the will do the talking, would be the best course of action.