Tax-free savings accounts are still relatively new, and not all the rules are well-understood. In terms of TFSAs and estate planning, there are some key points to keep in mind.
A TFSA loses its tax-exempt status upon the holder\u2019s death, with all income and gains accrued before death remaining exempt from taxes, but all income and gains after death becoming taxable. However, a TFSA-holder can name his or her spouse or common-law partner as the \u201csuccessor-holder\u201d of the account. In these circumstances, the TFSA will retain its tax-exempt status.
\u201cA surviving spouse or partner simply steps into the shoes of the decedent and becomes the new TFSA-holder,\u201d says Jamie Golombek, managing director of tax and estate planning with Toronto-based Canadian Imperial Bank of Commerce<\/b>\u2019s private wealth-management division.
If the surviving spouse already owns a TFSA, the decedent\u2019s TFSA can be rolled into the surviving spouse\u2019s TFSA without affecting the latter\u2019s contribution room.
Although only a spouse or common-law partner can be named a successor-holder, anyone can be named the beneficiary of a TFSA, unless the accountholder is a resident of Quebec. In that situation, the beneficiary receives the funds from the TFSA tax-free but the TFSA itself is dissolved, and any future income or growth of those funds is taxed in the hands of the beneficiary.
The key benefit of naming an individual beneficiary, rather than the estate, is that the funds from the TFSA can bypass the estate \u2014 thus avoiding probate taxes, which can be high in some provinces.
However, this consideration may not apply if the heirs are minors. In such a case, it may be advisable to run the assets through the estate and create a trust for the beneficiaries.
The wording used when setting up the TFSA is important, Golombek cautions. If the TFSA is being left to a spouse, the spouse should be named as a successor-holder rather than a beneficiary. That\u2019s because any gains in the TFSA that arise between the time the holder dies and the date when the spouse actually contributes the funds to his or her own TFSA will become taxable in the hands of the spouse who is named as a beneficiary.
The spouse named as a beneficiary can still move the funds into his or her TFSA, without affecting contribution room, as long as it is done by Dec. 31 of the year following the decedent spouse\u2019s death. A Canada Revenue Agency Form RC240 has to be filed within 30 days of making the rollover into the surviving spouse\u2019s TFSA. \t IE<\/b><\/p>\n","protected":false},"excerpt":{"rendered":"
TFSAs are not always as simple as they look, and it is wise to review the rules regarding which heirs are entitled to continue holding the assets tax-free \u2014 and which are not<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[3013,3018],"tags":[2600,2590],"yst_prominent_words":[],"acf":[],"_links":{"self":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/317636"}],"collection":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/comments?post=317636"}],"version-history":[{"count":1,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/317636\/revisions"}],"predecessor-version":[{"id":363324,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/317636\/revisions\/363324"}],"wp:attachment":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/media?parent=317636"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/categories?post=317636"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/tags?post=317636"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/yst_prominent_words?post=317636"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}