Are you planning your estate? Do you have a close family member or loved one whose estate you’re helping to plan? If so, it’s crucial to understand the difference between TFSA successor and beneficiary roles.
When the original TFSA holder passes away, their TFSA will be passed on to a designated successor holder or beneficiary. While these two roles share similarities, they’re also uniquely different.
Below, I’ll outline what differentiates a TFSA successor holder from a beneficiary so that you can plan according. I’ll analyze both roles based on the following criteria:
- Who can the role be given to
- TFSA account ownership
- How the TFSA is taxed
- How it affects TFSA contribution room
If the TFSA has a surviving spouse or common-law partner, they’ll usually be designated as the TFSA accounts successor holder. The deceased typically names the successor holder in their estate.
Once the original TFSA holder passes away and their estate is executed, the successor holder will be given full control of the deceased’s TFSA. The account will be placed under their name. If the successor holder has an existing TFSA account, they will now possess two separate TFSAs.
- Related Reading: How Many TFSAs Can One Person Have?
- The inherited TFSA amount isn’t taxed
- Funds within the TFSA can continue to grow tax-free
- The original account doesn’t need to be collapsed, as it’s transferred to the successor holder’s name
- The successor holder’s own TFSA contribution room isn’t affected
- The successor holder can only be the spouse or common-law partner of the deceased
- Can complicate estate planning if the deceased wants to distribute their TFSA funds to multiple individuals
A TFSA beneficiary could be anybody designed in the deceased’s estate, such as a child, nephew, sibling, or even a friend. When the will is executed, the funds from the TFSA are distributed as a lump sum payment to the beneficiary. They do not assume direct control over the account itself.
The funds received don’t affect the beneficiary’s own TFSA contribution room. However, the funds received can’t continue to grow tax-sheltered, which means they’ll be taxed on any additional income the lump sum payment generates.
- Anybody can be designated as a beneficiary (not just a spouse/common-law partner)
- The beneficiary’s own TFSA contribution room is not affected
- Beneficiaries inherit the TFSA funds tax-free
- The beneficiary isn’t given full control of the TFSA account, as funds are distributed as a lump sum payment
- Income generated by the payout is subject to standard capital gains taxes
- The transfer process is more complex compared to a successor holder
Now that you have a general idea of the differences between these two inheritance designations, here’s a complete breakdown of the differences between a TFSA successor holder and a TFSA beneficiary.
One of the primary differences between a TFSA successor holder and a beneficiary is who can take on the role.
Specifically, a successor holder must be the spouse or common-law partner of the deceased individual.
By contrast, a TFSA beneficiary can be any individual that the deceased names in their estate. A beneficiary could be a:
- Romantic partner (not a common-law spouse)
- Business partner
- Distant relative
- … or anybody else
Compared to a successor holder, there is a broader definition of who can be named as a beneficiary, making it a more flexible option. Multiple beneficiaries can also be named, allowing the TFSA funds to be split and distributed accordingly.
Another key difference between the two inheritance roles is how the TFSA account is treated after the account holder passes away.
If the account holder has named their spouse or common-law partner as a successor holder, then full ownership of the TFSA account will be passed to them. The successor holder will be named the new account owner, and the account will remain the same as before the original owner’s death.
Beneficiaries, on the other hand, do not gain control of the deceased’s TFSA account. Instead, they receive a lump sum payment based on the fair market value of the assets within the deceased’s TFSA.
If multiple TFSA beneficiaries are named in the estate, each will receive a lump sum payment based on a defined percentage.
The benefit of being named a successor holder is that you’ll have full control of the TFSA account. This means that the assets within the TFSA can continue to grow tax-sheltered. New contributions can also be made.
Both TFSA successor holders and TFSA beneficiaries receive the inherited TFSA assets tax-free. Once a TFSA account is passed on to a successor holder, they don’t have to worry about paying any taxes on the assets received or paying taxes on future profits realized within the TFSA.
The main difference here is that beneficiaries don’t receive the TFSA account but rather a lump sum payment based on the fair market value of the assets within the TFSA.
While beneficiaries aren’t taxed on the lump sum payment, any future profits generated by that sum of money are taxable.
For example, if the beneficiary deposits $50,000 of inherited TFSA funds into their personal Questrade investing account, their profits will be subject to capital gains.
The TFSA successor holder, by contrast, wouldn’t have to pay capital gains taxes on any profits seen within the TFSA account, as they would retain full control of the TFSA.
Here, I’d say that TFSA successor holders have a greater tax advantage compared to TFSA beneficiaries.
All Canadians eligible for a TFSA have a defined contribution room for their accounts. Each year, the government increases the annual contribution room, adding to the individual’s total TFSA contribution room.
Neither TFSA beneficiaries nor successor holders have to worry about their personal contribution room being affected by inheriting a TFSA.
That being said, TFSA successor holders must account for their available contribution room since they’ll have another TFSA under their ownership. Despite having full control of the inherited TFSA, their annual contribution room remains the same.
To summarize, here’s a quick table outlining the key differences between TFSA beneficiaries and successor holders:
|TFSA Successor Holder||TFSA Beneficiary|
|Who the role can be given to||Can only be the spouse or common-law partner of the deceased.||Any eligible individual can be named a beneficiary (child, sibling, friend, business partner).|
|Account ownership||Retains full control of the existing TFSA, as it’s passed into their name.||Aren’t given the TFSA account itself. Rather, they’re paid a lump sum based on the TFSA’s fair market value.|
|Taxes||No taxes imposed for inheriting the TFSA. Assets continue to grow tax-sheltered.||No taxes imposed on the inherited sum. However, future investments made with the sum are subject to taxes.|
|Contribution room||Doesn’t affect the recipient’s TFSA personal contribution room.||Doesn’t affect the recipient’s TFSA personal contribution room.|
TFSA successor holders have a greater tax advantage, as they retain control of the deceased’s TFSA. This means the TFSA can continue to grow and realize tax-free profits. Beneficiaries only receive a lump sum payment and are taxed on future profits realized with the sum.
Who will receive your TFSA assets when you pass away? If you have yet to create an official will and testament, you can start yours online today. Keep reading for my full review of Epilogue – one of Canada’s best online will services!