“My father passed away earlier this year,” Deanna tells me. “I went with my mother to the bank to get all the paperwork sorted. Since the lady that used to help them retired years ago, we took whoever was available that day. She wasn’t young, but she certainly didn’t inspire my confidence.”
Ah yes, another TNL@TB tale. Sadly the bulk of the population gets financial help, advice and guidance from bank branch employees who are thinly trained and lightly qualified. And don’t even ask about their compensation. Pathetic.
Dee says the yellow flag went up during that first meeting when they discussed dad’s TFSA. The banker confused ‘beneficiary’ with ‘successor holder’, failing to understand the difference or the implications for mom. Then came this zinger: “She scrolled through my mother’s accounts and suggested that she transfer the TFSA to her chequing account.”
“I gave her the look I give my kids when they are inexcusably negligent,” Dee admits. “I had to spell it out to her that we wanted to preserve that money in a TFSA account. She, hackles up, lectured me about how the bank will not simply put a different name on a TFSA account of a deceased person. I pointed out the text in the canada.ca website that explicitly states that a simple name change is what should happen. In the end we agreed that instead the funds would be transferred in kind to my mother’s direct investing TFSA account. I think she hates me now, but so what?
My mother would have simply signed away that TFSA if I wasn’t in the same room. I was incandescent with first-world rage. However I found that most of my family and friends couldn’t truly grasp the enormity of that bank lady’s mistake. I didn’t feel like they were indignant enough. So I had to turn to the one place where I knew I would get some high quality commiseration on this topic. You.”
So let’s just recall what the options are for a TFSA when you croak. The account can be liquidated and added to your estate. Since you funded it with after-tax dollars and growth was tax-free, there is no extra levy upon death. (This is not the case with an RRSP, for example, which is taxed mercilessly if not passed to a qualified bene.) Or you can hand it off, no tax, to a spouse, partner, dependent child, charity or your Corgi’s trust fund.
As Dee points out, trashing the TFSA means the loss (forever) of that account’s tax-free growth potential. And why would you want that?
As for naming a beneficiary for an account as opposed to a successor holder, there’s a meaningful difference. As SH, mom actually takes over the TFSA, folding it into her own, retaining all of the assets and the tax-free growth status.
That would not be so if she were named the beneficiary.
Yes, the TFSA still passes on free of tax, but the income and growth from the date of dad’s death until the distribution (which can easily be months) is taxable as income. Also, a beneficiary would need enough empty contribution room in their TFSA to incorporate this money into that account (if not a spouse or common-law partner), to continue enjoying tax-free returns. Successor holders, in contrast, don’t need to have this room available. They can just suck the existing account into their plan.
Here’s some advice this blog has proffered before: If your spouse messed up and named you as a bene instead of a SH, it may still be possible to roll the TFSA assets of the deceased into your own. This ‘exempt contribution’ must be done before the end of the year in which death came, and be registered with the CRA within 30 days. (In Quebec a valid will is required to move a TFSA, by the way.)
The moral(s) of this story: everybody needs a will, a POA, an executor (hopefully not your kid) and registered accounts that are correctly designated. Know who you can pass an account to in a tax-efficient manner, not just the money or assets. Also be careful where you seek advice. TNL@TB is there to serve the bank, not you. A lawyer, accountant or financial advisor you hire to do these things, in contrast, works for your interests.
Never forget. Free advice is worth what you pay for it. Oh, wait…
About the picture: “Enjoying the wonderful cities and mountains of Chile and Argentina,” write Julie and Neil. “Lots of street dogs roaming around everywhere and for the most part very well fed. They like their naps and tune out the crazy world! Here’s one from the Atacama desert.”
To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.