When I first started writing this article, I was planning to use the title “This TFSA secret could be worth $1,000’s – or more!”. But I decided the above title was more informative regarding what the article is actually about. Nevertheless, as we’ll see, it is true that this TFSA “secret” could be worth a lot to you, your spouse, and your family.
People may know what a beneficiary is, but I’d bet that most people have no idea what a TFSA successor holder is and how it’s different from a standard beneficiary. I sure didn’t. Not until about two years ago when I happened to come across it by accident.
The TFSA (or, Tax Free Savings Account) on the other hand, is something most Canadians have heard of given it’s one of the top registered account options for building wealth over time. You gotta love the flexibility of the TFSA, and the ability to watch your investments grow tax free over time!
Related article: RRSP or TFSA? Which is best for you?
Before getting into the specifics of how a successor holder differs from a beneficiary, let’s level set on what a beneficiary is and why designating beneficiaries is important.
What is a beneficiary?
This summary from Investopedia is helpful:
A beneficiary is a person (or entity) who is designated to receive the benefits of property owned by someone else. Beneficiaries often receive these benefits as part of an inheritance.
A beneficiary can be designated in the documents relating to a life insurance policy, a retirement account, a brokerage account, a bank account, and other financial products.
It’s important to designate beneficiaries for your financial assets so that they can be distributed according to your wishes when you pass away.
Who can be a beneficiary for a TFSA account?
For a TFSA, and for most investment accounts, a beneficiary can be your spouse or common law partner, your children or other family member, a friend, or a registered charity.
For the sake of simplicity, when I mention “spouse” in this article going forward, I’m referring to a spouse through marriage or a common law partner.
Why naming a beneficiary is important.
By naming a beneficiary we ensure that the value of an account goes where we want it to go.
Having beneficiaries clearly identified will also speed up the processing of the estate and can keep investment funds out of the probate process. This is a good thing because avoiding probate will reduce costs by avoiding probate fees and increase privacy since assets passing through the probate process become part of the public record.
Don’t forget to update your beneficiary designations!
It’s also important to make sure we update our beneficiaries as needed when a major life event occurs, such as a marriage or divorce.
As an example, imagine if your spouse had an ex-wife from a prior marriage and failed to update his TFSA or RRSP beneficiary information before passing away unexpectedly. If the ex-wife was still the named beneficiary on the account, the proceeds of the account would go to her. And in the case of the RRSP, the taxes owed as a result of cashing out the account would have to be paid by the estate. Ouch!
To summarize, it’s important to name beneficiaries for investment accounts, bank accounts, insurance policies, etc., AND it’s important to make sure we update beneficiaries when needed.
The TFSA successor holder.
The successor holder is a special designation that is unique to the TFSA. It’s similar to a beneficiary but has some very important, and very valuable, differences.
First, we can only name a spouse or common law partner as a TFSA successor holder, whereas practically anyone can be named as a beneficiary.
Second, with the successor holder designation, the TFSA account will transfer intact to the surviving spouse. Essentially, the TFSA of the deceased will now be owned by the surviving spouse, including all assets and available contribution room, and will continue to grow tax free.
As a successor holder, it’s possible for the surviving spouse to end up owning two TFSA’s, their own account and the successor holder account from their deceased spouse.
How is the successor holder better than the beneficiary designation?
As a beneficiary the surviving spouse would receive the value of the TFSA assets tax free and the account would be closed. But, they would then need to invest the funds somewhere else. They could move the funds to their own TFSA or RRSP, if they have available contribution room, otherwise they’d have to move the funds to a taxable account.
As a successor holder, the entire TFSA account transfers to the spouse, and the assets continue to grow tax free! Clearly, this is a much better position to be in for the surviving spouse.
Because available contribution room also transfers with the successor holder account, it’s important for spouses to name each other as their TFSA successor holder even if they don’t currently have a lot invested in the account.
That available contribution room is valuable!
How do I name a successor holder or beneficiary for my TFSA?
The easiest way to name a beneficiary or successor holder for a TFSA is when you’re setting up the account. You’ll usually have an opportunity to identify a successor holder or beneficiary when you complete the application for the account.
If you want to make a change or an addition after the account is set up, you can do this by calling the institution that issued the account. Unfortunately, the name of the beneficiary or successor holder is often not noted on statements for the account, so if you’re unsure about who you previously named you should definitely call to confirm.
You’ll also want to check if you used the successor holder designation for your spouse.
The bottom line.
If you have a TFSA and you have a spouse or common law partner, you should consider naming them as a successor holder for your TFSA account – and they should do the same!
The successor holder designation provides greater value and flexibility to the surviving spouse versus the simple beneficiary designation.
Lastly, be sure to confirm who you’ve identified as a beneficiary or successor holder on your TFSA account and make updates as needed when major life events occur.