Published by the Private Client Team at KJ Harrison Investors
The death of a spouse can have a significant emotional impact on the entire family. Yet in our work advising high-net-worth families, we often see that survivors’ grief is compounded by an unexpected source of stress—namely, the complications that can arise in the family finances when a spouse dies. Confusion and frustration over taxes, access to accounts, the transfer of assets and other financial issues can easily make an already difficult situation even more stressful and overwhelming.
In our youth-oriented society, we often avoid talking about the practicalities of death because, well, we don’t much like contemplating dying. But when it comes to finances, forewarned is forearmed. Understanding how assets, debts, pensions, and other financial matters are treated in the event of a spouse’s death is crucial to developing a plan that will minimize chaos and stress at the most difficult of times—and help ensure a stable financial future for the entire family.
Here are few things to consider:
- Pension plans
High-net-worth individuals often overlook the importance of government pensions, but they can be an important component of retirement income given that they are a) stable and b) indexed to inflation. When a spouse who contributed to the Canada Pension Plan dies, the surviving spouse could be eligible for the CPP Survivor’s Pension, which pays out a monthly amount based on the deceased’s lifetime CPP contributions. The CPP also offers a one-time death benefit of up to $2,500 to help cover funeral costs. But take note: you or the estate will have to apply for these
CPP programs—they are not automatic.
Employer pension plans, meanwhile, also often offer survivor benefits, which can sometimes be offered either as ongoing monthly payments or in a lump sum.
- RRSPs, RRIFs and other retirement savings plans
First, the good news: assets held in registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs), locked-in retirement accounts (LIRAs) or life income funds (LIFs) can typically be transferred to the surviving spouse’s tax-deferred savings plans without incurring taxes or probate fees. There is one minor condition—the transfer must occur by Dec. 31 of the year following your spouse’s death—and one very big condition: you must be named as the designated beneficiary of the plan, either in the deceased’s will or in the RRSP contract with the financial institution.
The
bad news happens when there is no designated beneficiary or—the less likely event—when a transfer to the designated beneficiary does not take place before the deadline. In those cases, assets held in the registered plans become part of the deceased’s estate; the market value of those assets will be added to the deceased’s income, resulting in taxes owed.
Because they are now part of the estate, they are also subject to probate—the legal process of verifying a deceased person’s will, which can be both time-consuming and expensive. (In Ontario, probate fees alone, not counting the cost of lawyers, are about 1.5% of assets for estates over $50,000.) The assets might also be subject to claims against the estate by creditors.
Obviously, you want to minimize probate fees, taxes and potential legal complications when your spouse passes. So make sure your spouse’s registered plans (and yours, too) designate a beneficiary.
Tax-free savings accounts (TFSAs) offer similar tax-free transfer options as registered plans, but with an added wrinkle. If your spouse designated you as a beneficiary of the TFSA, the account will be closed and the proceeds will be transferred to you tax-free, but any future returns on those assets will be taxable (because they are no longer sheltered in a TFSA). However, if you have been named as the
successor holder, then the TFSA itself is transferred and it maintains its tax-free growth status.
- Other assets and debts
If assets like bank accounts, non-registered investments and real estate are jointly held by you and your spouse, then the right of survivorship dictates that these assets are automatically transferred to the surviving spouse. There is no need for probate, and no tax liability is triggered immediately—that would happen if or when the survivor liquidates the assets. If the asset in question is your principal residence, then it would typically be shielded from capital gains taxes even if you do sell.
Similarly, payouts to beneficiaries of life insurance policies, although not necessarily assets
per se, are typically free from taxation and bypass the probate process.
What applies to assets also applies to debt, however: if you and your spouse have joint credit cards, joint mortgages or joint loans, then upon the death of one spouse the survivor becomes fully responsible for the balance owing.
What happens if assets and debts are solely in the deceased’s name? In the case of debts, your deceased spouse’s estate would be responsible for paying them back. Assets would be rolled into the estate, as well, and would be subject to probate, creditor claims and possible legal challenges. There could also be capital gains tax consequences, because all assets (with few exceptions, like a principal residence) are deemed sold at fair market value at death.
- Tax filing requirements
Many surviving spouses are surprised to find that a tax return still has to be filed on behalf of their deceased partner’s estate. In fact, the executor of the estate must file a final tax return for the period between Jan. 1 and the date of death, including all income and capital gains. Deadlines apply. If your spouse passed in the first 10 months of the year, the return is due on April 30 of the following year; if the death occurred in November or December, the return is due six months after the date of death.
- Some practical to-dos
Here are a few financial housekeeping steps to take after a spouse passes:
- Obtain multiple death certificates. You will be asked for them when dealing with banks, government agencies and other service providers, so having several on hand will help avoid delays in getting matters settled.
- Notify relevant government agencies. Social insurance number, health cards, driver’s licence—these and other documents will need to be cancelled. The Canada Revenue Agency should also be notified.
- Notify credit reporting agencies (Transunion and Equifax). Doing so will help prevent fraud.
- Contact financial institutions to update ownership of joint bank and investment accounts.
- Cancel credit cards to close individual accounts and prevent fraud.
Final thoughts
If all of that sounds like a lot to take on—well, it is. To reduce the headache and stress as much as possible, here is our advice.
First, put your emotional needs (and those of your family) first—they are more important than any financial considerations, which can usually wait until you have had a chance to grieve. Second? Get help. Consult your tax advisor and a qualified estate lawyer as soon as possible to ensure your spouse’s estate is distributed properly and that all tax obligations are met. Finally, when your husband or wife passes, talk with your strategic wealth advisor to review your financial situation and adjust your long-term plan as necessary.
The fact is, the death of a loved one is a major life
and financial event. But a little foreknowledge and preparation can help ensure that financial stress doesn’t make an already painful situation even more so.
