TFSA Successor Holder vs. Beneficiary- How to properly set up your TFSA.
Wednesday, November 29, 2023
TFSA Successor Holder vs. Beneficiary- How to properly set up your TFSA.
Wednesday, November 29, 2023
Mitch Zaba
When setting up your TFSA, you have to decide whether or not to name a successor holder, beneficiary, or both. This decision is important because your surviving spouse can lose the tax-sheltered benefits of your TFSA on death.
TFSA Successor Holder
Naming a successor holder on your TFSA only applies to married or common-law couples. Having a successor holder allows your surviving spouse to assume your TFSA even if you both have maxed out your contributions.
Example
Let's say you and your spouse both have contributed the maximum amount into your TFSAs, which for 2023 is $88,000.
Now, your spouse dies.
If your spouse names you as a beneficiary, your spouse's TFSA would be closed, and a cheque would be written to you for $88,000 plus any investment growth.
The challenge you have now is to find a new tax haven to invest this money now that you have one less TFSA to invest in.
Alternatively, with a successor holder, you will be able to keep your spouse's TFSA intact. In effect, you now have two TFSAs with $88,000 invested in each of them. This allows you to continue to grow your money, and your spouse's money tax-free.
[Note: Depending on which institution you hold your TFSA, you may be able to combine your spouse's TFSA into one TFSA held in your name. ]
By naming your spouse as a successor holder instead of a beneficiary, you can keep your money growing tax-free as if you both were still alive.
Future Contribution Room
As a successor holder, you can not make any additional contributions to your spouse’s TFSA. That means, if your spouse dies with $40,000 in their TFSA, you do not get to contribute the additional contribution room of $44,500 ($88,000 contribution room minus $40,000 contributions).
Your contribution room continues to grow by $6,500/year (the year 2023 rules) and you can only contribute to the TFSA held in your name.
Naming a Successor Holder and a Beneficiary
Naming a successor holder doesn’t disqualify you from also naming a beneficiary. Successor holders are limited to a spouse or common-law partner. A beneficiary can be any person or charity.
Many times, clients will set up a TFSA with their spouse as a successor holder and their children as beneficiaries.
On your spouse’s death, the TFSA will transfer to you as the successor holder, then be transferred to the beneficiaries when you die. You can compare this to a contingent beneficiary on insurance contracts. The beneficiaries will only receive the money if the success holder predeceases the TFSA owner (you).
Designation of an Exempt Contribution Form RC240
Surprisingly, the government allows you to name a successor holder after the death of a spouse. You can do this using a Designation of an Exempt Contribution Form RC240.
This form allows you to roll your spouse's TFSA into a TFSA in your name without affecting your contribution room.
There is one catch. This special designation must be completed within 30 days after you received the money.
Example: You receive $88,000 as a beneficiary of your spouse’s TFSA. With the Designation of an Exempt Contribution Form, you can contribute the money into your TFSA without affecting your TFSA contribution room.
This is a great benefit made available by the Canadian government that can avoid unnecessary taxes on future investment gains.
In Summary
- A successor holder is a unique advantage to married and common law partners.
- Depending on the institution, your deceased spouse’s TFSA will remain as a separate account with you as the new owner or the funds will be transferred into a TFSA in your name. In either case, the amount doesn’t affect your own TFSA contribution room.
- You can name both a successor holder and a beneficiary. The money goes first to the successor holder and then to the beneficiaries if the successor holder predeceases the TFSA owner.
- If you are a surviving spouse and you receive TFSA money as a beneficiary, you can contribute that money to your TFSA without affecting your contribution room. You must use the Designation of an Exempt Contribution Form provided by CRA.
Hi, I Am Mitch Zaba
Over the past 10+ years, we've worked closely with clients showing them how to grow their wealth, pay less taxes and how to create predictable passive income in the stock market.
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