Why You Should Consider Leaving Your RRSP Inside the Estate

Many people leave their RRSP to one of their heirs to avoid probate by naming them directly as a beneficiary. Aravind explains how this can lead to sibling conflict and why he advises to leave it in the estate for families with multiple children.

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You’ve made an interesting point on some of your posts that you think in a lot of cases, leaving the RRSP to the estate makes the most sense in the context of the other things. I completely agree. So walk our audience through why you believe that.

Awesome. Thank you. So first, I think a lot of the audience and maybe even a lot of other professionals might be asking, okay, walk us through like what happens. So first, if you’re married or you’re in a common law relationship, then yes, if one of you dies, leave the RRSP to the spouse because there’s a tax benefit to doing so it, it all moves over.

Next, assuming that you’re planning for both of you dying and you’re saying who then next? Many people would say, well, we can bypass what is called probate because there’s a very small fee in certain provinces. Like in Ontario it’s 1.5%. So if you think about a million dollar RRSP or a $500,000 RRSP, we’re looking at seven and a half grand to $15,000.

That’s the fee. It’s not about, not about other taxes, whether you leave it outside the estate or inside the estate, you’ll pay all the other taxes. That’s the fee that people focus on. Here’s the catch. CRA still wants their taxes. So this is the first piece. CRA still wants their taxes out of that RRSP.

So when you leave that RRSP to somebody else, so let’s say mom and dad pass away, they have three kids and they decide to leave the RRSP to one of the kids to take care of or steward properly, CRA goes after the remainder of the estate first. So they will look at the taxes on that RRSP. So let’s say a million dollar RRSP, roughly about $500,000 in tax.

They’re gonna go after the house that mom and dad left behind. They’re gonna go after the other vehicles, jewelry, TFSA, whatever the case might be that they’ve chosen to leave in the estate. So now you have three kids. But if one kid got the RRSP and the other two are supposed to split the remainder of the estate, well a million dollars went to kid one and kids two and three got a $500,000 tax on top of what was in the estate.

So that first and foremost is the, I would say, the easy reason that it’s easier to put the RRSP in the estate.

Yeah, it’s a fairness issue. It’s a family friction issue, and I mean, remember, they’re not under any legal obligation. The person who got the RRSP to settle this out, if I’m not mistaken.

No, and, and that’s where a lot of, you know, parents wanna believe, and I think we all wanna believe that when we raise our kids, our kids are gonna do what’s right and, and all of those pieces. But, but we can’t predict how grief changes things or what happens if you were sick and one of your kids took care of you and the other two didn’t.

What happens then? Like, how, how are they going to feel? So you run a massive emotional risk that, that you’re not even seeing necessarily