Leaving Assets to Minors
By Heather Rivers, BA, CFP®, FMA, CPCA®
Communications and Education Specialist,
Odlum Brown Financial Services Limited
Did you know that leaving money or assets to a minor can lead to complications? To prevent this, take extra steps with a legal professional to ensure that a trustee can administer the funds.
If minors are beneficiaries under your will, insurance or registered plans, or if bequests to other beneficiaries might cascade to a minor if an adult beneficiary predeceases you, appointing a trustee to administer and invest the funds on behalf of a minor may be prudent. Lacking a trustee may result in extra costs, time and administrative hurdles which can complicate and delay the process of distributing the funds intended for the minor and perhaps also delay settling your estate.
Various provincial statutes place restrictions on the distribution of assets directly to minors, instead requiring that they be held in trust on the minor’s behalf. Certain jurisdictions may even require a parent or guardian to make an application to the courts to be designated as trustee. In BC and Ontario, the Public Guardian and Trustee (PGT) must be notified of such an application and may challenge it. If the PGT acts as trustee, management and use of the funds while the beneficiary remains a minor may not reflect the deceased’s wishes.
Naming minors in a will:
If you wish to leave a specific asset or sum of money, some provinces allow a small amount to be paid directly to a minor. To leave amounts greater than the provincial limit or any amounts paid from the estate’s residue (rather than a specific bequest), the will should appoint a trustee and outline trust terms, such as what powers the trustee has to pay income or capital, what powers the trustee has to allocate income to the minor for income tax purposes, and at what age the beneficiary can receive the remaining capital.
Naming beneficiaries on a life insurance policy:
Life insurance companies may offer a variety of payout options, such as payment to a trustee for a minor, an annuity for a beneficiary or an insurance trust. Careful planning is necessary to ensure the various options fit within the larger context of your estate and tax planning. If you would like more information on the products and services, including insurance options, available through Odlum Brown Financial Services Limited, contact us through your Odlum Brown Investment Advisor or Portfolio Manager.
Naming beneficiaries on registered plans:
Registered plans include Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Tax-Free Savings Accounts (TFSAs), workplace pensions and other group benefit plans such as group RRSPs. Such accounts generally need to be paid to a trustee prior to being accessible by the child at the age of majority. The age of majority is 19 in BC and Ontario, as well as the territories, and 18 in the other provinces. As a result, it is prudent to consider if a beneficiary will be fiscally responsible to administer and manage their bequests at that age.
In most provinces, beneficiary designations for registered accounts can be made using an account form, a will or a stand-alone document and, if correctly worded, should allow the accounts to bypass probate administration and probate fees. Using either a will or stand-alone document to designate minor beneficiaries further allows a trustee and trust terms to be specified.
To ensure that funds are paid out as you intended, the financial institution managing the registered plans would need to be provided with documentation of the designation, and documents would need to be updated whenever accounts are added or altered (e.g., if an RRSP was subsequently converted to a RRIF). Legal advice is highly recommended when creating or altering beneficiary designations.
As a general rule, upon death, the fair market value of your RRSP or RRIF is included as income on your final tax return and taxed at your marginal rate. A notable exception to the rule is the ability to rollover the account to a surviving spouse or common-law partner. If you designate your financially dependent minor child or grandchild as beneficiary of your RRSP or RRIF, it may be possible to defer and reduce the overall taxes payable on the RRSP/RRIF proceeds by using them to purchase a term certain annuity for the minor beneficiary and spreading the payments over a number of years. The annuity payments would need to start no later than one year after the purchase and cease by the end of the year they turn 18. The annuity payments would be taxable as the child’s income when received.
If your financially dependent child or grandchild is eligible to open a Registered Disability Savings Plan (RDSP), they can also rollover RRSP/RRIF proceeds to their RDSP to the extent of their available maximum lifetime contribution limit of $200,000.
Whether you are considering how to include minors as beneficiaries in your will, on life insurance policies or on registered plans, it’s important to seek professional planning advice to ensure that the legacy you’ve worked hard to create is shepherded effectively to the next generation.
The information contained herein is for general information purposes only and is not intended to provide financial, legal, accounting or tax advice to be relied on without an individual first consulting with their legal advisor to ensure the information is appropriate for their individual circumstances. Odlum Brown Financial Services Limited (OBFSL), a wholly owned subsidiary of Odlum Brown Limited, can offer Odlum Brown clients a variety of coverage options from many of Canada’s top insurance companies tailored to suit their individual needs. Our licensed professionals are here to help you assess your position and then implement customized recommendations to meet your individual circumstances and needs. For more information, please contact your Odlum Brown Investment Advisor or Portfolio Manager.