Perhaps because tax season is upon us, or perhaps just by way of coincidence, I have noticed that I have been asked to explain estate planning issues relating to RRSPs more frequently than usual in recent weeks. Most people seem to understand the rollover associated with naming a spouse as beneficiary to an RRSP. Many also know that if a beneficiary is designated, the fund flows directly to the beneficiary, and does not form part of the owner’s estate that, so probate is not required for the transfer.
There is one consequence of which clients are less often aware: when a designated beneficiary is named, the funds are not available to creditors of the estate because they do not form part of the estate.
The Ontario Court of Appeal confirmed this concept in Amherst Crane Rentals v. Perring (“Amherst Crane”). In 2005, the Supreme Court of Canada refused to grant leave to appeal, so this is law in Ontario. In Amherst Crane, the deceased died owing approximately $53,000 and leaving $117,000 in RRSPs, to which he had named his wife a beneficiary. He had no other significant assets. His wife collected the RRSP funds and the estate declared bankruptcy. The creditor was unsuccessful in his action to collect from the RRSP funds. This ruling helped clarify the creditor protection aspect of RRSP funds.
The protection is lost, however, if an RRSP owner neglects to designate a beneficiary. If the RRSP becomes part of the estate, it becomes available to creditors (as well as subject to probate). Where the RRSP is not the deceased’s only asset (unlike in Amherst Crane), another part of the estate, perhaps one intended for a different beneficiary, will need to be used to cover those debts. While many clients are quite content to know that debts cannot be satisfied from RRSP funds, they need to think about whether they expect to have significant debts, and the source from which those debts should be paid.
LESSON LEARNED: Remember to explain the creditor-protection aspect of RRSPs to clients – some may not be comfortable with the idea that, if their estate were insolvent, their RRSPs will not be used to satisfy debts.
Until next time,