The Learning Centre:
TFSA MASTER CLASS – LESSON 3: Passing on your tax-free savings account after you’ve passed away.
To paraphrase Benjamin Franklin, the only things certain in life are death and taxes.
But hey, there’s actually a silver lining to that cloud of reality. While you can’t escape the former, there is something you can do to prevent your Tax-Free Savings Account from becoming taxed after you’ve passed away.
Well, two things actually:
- Appoint a ‘successor holder’ for your TFSA
- Name a designated beneficiary (or beneficiaries) for your TFSA
Your best option for passing on your TFSA to your spouse or common law partner upon your death is to name them as ‘successor holder’.
As successor holder, they will be able to seamlessly take over your Tax-Free Savings Account after you die. This means the TFSA will continue to exist, with the income earned sheltered from tax. They will be able to administer, contribute to, and withdraw from the account as their own.
Limitations: Only your spouse or common law partner can be named as successor holder.
As for everyone else — they can benefit by being named as ‘designated beneficiary’ of your TFSA.
Designated beneficiaries can include a spouse/former spouse, common law partner, child/grandchild, friend, or a ‘qualified donee’ (such as a registered charity). When a designated beneficiary is named, that beneficiary will be able to receive tax-free proceeds up to the fair market value of your TFSA upon your death, however the TFSA itself will cease to exist.
Limitations: The beneficiary designation does not preserve the tax-free status of the TFSA, other than for income earned prior to your death. Income earned in the TFSA after the date of death will be taxable to the beneficiary.
Example: Sarah Jane dies with a TFSA valued at $80,000. By the time the assets are distributed to the beneficiaries, the value has grown to $82,000. While the beneficiaries can receive a tax-free payout up to $80,000, the $2,000 in growth since Sarah Jane’s death will be taxable income to the beneficiaries.
The only way beneficiaries will be able to protect this income growth from tax is by contributing it to their own TFSA (this of course will be subject to the beneficiaries’ own available TFSA contribution room—see Lesson 2). TFSA contribution room aside, making the beneficiary designation will prevent your estate from paying probate fees on the value of the TFSA.
Ignorance isn’t always bliss—especially when it comes to your hard-earned, tax-free money.
However, the more you educate yourself, the more you’ll be in a position to ensure the assets you worked so hard to build in life are passed on in the most tax-effective manner after you pass away. If you still have questions regarding your own TFSA, we’re here for you. Our dedication to providing education members with the financial answers they need spans over four decades. That means we have come to understand all of the unique elements that make up your own educator-specific financial world.
Don’t pass on the kind of financial advice that understands you.
Reach out to an Educators financial specialist today for answers to your specific TFSA questions. Plus check out The Learning Centre to enhance your financial literacy on a wide range of other topics.
The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting or professional advice. Please ensure to consult your accountant and/or legal advisor for specific advice related to your circumstances. Educators Financial Group will not be held responsible or liable for any losses, costs, damages or expenses incurred by reason of reliance as a result of the aforementioned information. The information presented was obtained from sources that are believed to be reliable. However, Educators Financial Group cannot guarantee their completeness or accuracy.