Your Tax-Free Savings Account (TFSA) plays a unique role in your estate plan. Unlike many other assets in your estate, your TFSA can pass tax-free to beneficiaries. Note, however, that any interest, dividends or capital gains earned by the TFSA assets after the date of your death and prior to distribution are subject to tax.
Here’s a look at some common beneficiary choices and their advantages.
Leave it to an adult child. Provided there is contribution room available, the beneficiary can contribute the proceeds to his or her own TFSA, where they can continue to grow tax-free.
Use it to cover final costs. When left to your estate, your TFSA provides a valuable source of liquidity that can be used to pay off outstanding debts, cover taxes or offset other estate-settlement costs.
Donate to charity. When you name a charitable organization as beneficiary, your estate can claim the charitable donation tax credit.
Leave it to your spouse as successor holder. You can leave your TFSA to your spouse as either beneficiary or successor holder. As successor holder, your spouse simply takes over your TFSA. If you name your spouse as beneficiary, on the other hand, the assets would have to be transferred to his or her TFSA and any income generated in the interim would be taxable. Note that only your spouse or common-law partner can be named successor holder. In both cases, the transferred assets do not affect your spouse’s TFSA contribution room.
If you have any questions about your own beneficiary designations, whether for your TFSA or any other assets, we’d be happy to answer them.