TFSA Beneficiary vs Successor Holder? The difference is HUGE!
Fee-for-service financial planner and founder of PlanEasy.ca
We’re always told to make sure we have beneficiaries designated on all our accounts. We’re told to make sure that our beneficiaries are in accordance with our final wishes and we’re also told to review them regularly.
But when it comes to the TFSA there is another, more important designation, the successor holder, and in some cases we don’t want to list a beneficiary on our TFSA we want to list a successor holder instead.
There are lots of benefits to having a beneficiary (or successor holder) designated on your account. It helps expedite things after you pass. It helps your loved ones access cash and investments faster. It helps avoid probate fees. And it helps keep assets from entering the estate and getting held up in the estate process.
Having a beneficiary also helps to keeps things private. When you don’t have a beneficiary list on your account, your assets pass through your estate. Estate information is available to the public, so any assets passing through your estate are out there available for everyone to see. By naming a beneficiary on your account, the assets in that account avoid your estate and go directly to the beneficiary. They’re kept private and no one knows the details.
But when it comes to the TFSA there is another designation that you can make on your account. The difference is subtle, but like many things in personal finance the impact can be HUGE.
When it comes to the TFSA you can designate someone a beneficiary but you can also name someone a successor holder.
Here’s the difference…
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Beneficiary vs Successor Holder
For any TFSA you can name a beneficiary but you can also name a successor holder. You can do one, the other, or both.
The best way to describe the difference is that a beneficiary would get the money, but a successor holder would get the account.
That means that a beneficiary of a TFSA would receive all the money within the TFSA tax-free but then the TFSA would get shut down. A beneficiary will lose all that tax-free space. Unless the beneficiary has TFSA contribution room available they will start to be taxed on any investment gains going forward.
A successor holder on the other hand would receive the account with the money inside it. A successor holder would get to keep all that tax-free room. The TFSA is now theirs. If they make a withdrawal they would get that contribution room back the next year. That’s amazing!
Not everyone can be named a successor holder. Only spouses and common law partners can be named a successor holder.
Brothers, sisters, parents, children, friends etc can be named a beneficiary on a TFSA but not a successor holder.
“I’m Married But Listed As A Beneficiary, Am I Out Of Luck?”
Even if your spouse has accidentally named you a beneficiary and not a successor holder you’re not completely out of luck. There is an opportunity for spouses and common law partners to receive the same rights as a successor holder even if named a beneficiary.
But that opportunity is short and must happen soon after their partners passing. It has to happen by December 31st, the year following their partners passing. And even then, the investment gains between those two points are taxable.
The best thing for spouses and common-law partners to do is list a successor holder.
Check Your Beneficiaries
It’s a good practice to check your beneficiary is on all your accounts periodically. It may have been years since you initially set the beneficiary. Your circumstances may have changed during that time. You may have children, a spouse, a new partner etc. If you have a spouse or common-law partner make sure that your designated them a successor holder on your TFSA. It’ll make things that much easier for your partner.
Financial planner, personal finance geek and founder of PlanEasy.