The article “How to leave money to your grandkids” was originally published in MoneySense on December 28, 2021. Photo by Ekaterina Shakharova on Unsplash.
In my experience, most people leave their entire estate to their children. But you can name other people to receive a dollar amount, a specific asset, or a percentage of your estate, including extended family, friends and charities. If you name your grandchildren as beneficiaries, there are several considerations.
How old they are can make a difference
If your grandchildren are over the age of majority and are responsible enough to receive an inheritance directly, they can be named as beneficiaries on a registered plan or of an insurance policy, or as beneficiaries in your will. (The best life insurance in Canada: your complete guide.)
If they are under the age of 18 or there are reasons that they should not receive their inheritance directly like a disability, substance abuse problems, or other concerns, their inheritance can be held in trust.
You can name a trustee in your will to hold assets in trust for your beneficiaries. An ideal trustee for a grandchild’s trust may be their parents and if you have grandchildren from multiple families, you could name different trustees for the different trusts.
A trust may have a limited duration, like until the beneficiary attains a certain age or for a certain number of years after your death. Some trusts may last for the lifetime of the beneficiary, like a Henson trust for a disabled beneficiary. A Henson trust is meant to ensure funds are available to provide for the beneficiary but help them to qualify for government support that may be lost due to asset or income thresholds. (What’s the difference between a will and a trust?)
What is a qualified disability trust?
Qualified disability trusts arising on the death of an individual and for a disabled beneficiary also benefit from special tax treatment. The income of the trust is taxed at graduated marginal tax rates, like an individual taxpayer, enabling income splitting between the trust and the beneficiary. This differs from other testamentary trusts which are taxed at the top marginal tax rate. (How to open a registered disability savings plan—aka RDSP.)
If your child or grandchild is disabled, your RRSP/RRIF can be transferred to their RRSP/RRIF or RDSP to defer tax for many years with no tax payable on death and future tax payable on their withdrawals.
The assets you can leave for grandkids: Money, savings and more
If you name a grandchild as the beneficiary of a specific asset, you should be mindful of the tax consequences. Some assets, like a memento or a car, may have no tax payable, though could be subject to provincial or territorial probate or estate administration tax. Others, like a cottage or a registered retirement savings plan (RRSP) and/or a registered retirement income fund (RRIF), may have tax payable. The tax is owed by the estate of the deceased, so consider the reduction in the rest of your estate’s value if you leave a specific asset to a grandchild.
A tax-free savings account (TFSA), RRSP, RRIF or another similar registered account can have a grandchild named as beneficiary. If they are named as beneficiary, the account passes outside of your estate and directly to a grandchild. Likewise with an insurance policy.
For a minor grandchild, having the funds paid into the estate may provide greater control over the funds based on the terms of a trust in your will. Funds inherited by an under-age beneficiary outside a will may have limited investment options and a forced distribution at the child’s age of majority.
If you have a registered education savings plan (RESP) for your grandchildren, keep in mind that the beneficiary for a RESP does not have the same meaning as with a RRSP or TFSA. An RESP beneficiary is not a testamentary beneficiary who receives the account on the death of the account holder. The RESP beneficiary is simply the person whose education is being saved for using the account.
Some financial institutions allow joint subscribers for a RESP or a successor subscriber (on death) to be named. You can also include a clause in your will to appoint someone to take over the RESP on your death, otherwise, the account may become part of your estate and not necessarily be used for the intended purpose.
More about taxes and wills
An RRSP or RRIF paid to a financially dependent child or grandchild can have some tax benefits. If they are under the age of 18, the funds can be used to buy a term-certain annuity with payments each year until they turn 18. This can split the taxation of the account over several years instead of a single one in the year of death.
Even if your RRSP or RRIF is paid into your estate, if your financially dependent child or grandchild is a beneficiary, your executor may be able to use some of the RRSP/RRIF funds to buy a term-certain annuity and defer and reduce tax. (For more on taxes, check out the 2021 MoneySense tax guide.)
Estate planning for grandparents
Estate planning is a personal process and anyone writing a will or naming beneficiaries should do what feels right for them. While most people name their spouse, failing whom their children, it is an option to include grandchildren or other beneficiaries. Grandchild beneficiaries have special considerations that should be taken into account.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever. If you have a question for Jason, please send it to email@example.com.