Estate planning with TFSA

What Happens to a TFSA When you Die?

Tax-Free Savings Accounts (TFSAs) are a great investment option with tax free investment growth and tax free withdrawals. Upon death, what happens to your TFSA depends on who the beneficiary is, or if you have named a successor holder.

TFSA Successor Holder or Beneficiary

Let’s look at the difference in tax consequences and probate, assuming the following designations:

Successor Holder – Spouse

Only your spouse can be designated as the successor holder of your Tax-Free Savings Account. The successor holder is designated instead of a beneficiary. The benefit of naming a successor holder is the full value of your TFSA transfers to your spouse upon death, including any growth after the date of death, with ZERO tax consequences. The account bypasses probate and the transferred amount doesn’t affect your spouse’s TFSA contribution room.

Beneficiary – Spouse

When your spouse is designated as the beneficiary of your Tax-Free Savings Account, upon death, only the value at date of death is transferred to your spouse tax free. This transfer does not affect their TFSA room as long as it’s done by December 31st of the year after your spouse dies. The account will bypass probate.

Before the account transfers to your spouse: the growth in the account after the date of death is reported as taxable income to your spouse; and is reported on a T4A slip in the year your spouse received the TFSA.

Beneficiary – Not your Spouse

When you name a beneficiary that is not your spouse, only the value at date of death is received by the beneficiary tax free. Any growth from date of death would be taxable to the beneficiary on a T4A slip. Also, the value of the TFSA cannot be transferred to your beneficiary’s TFSA UNLESS they have the contribution room.

The TFSA account would not be subject to probate.

Beneficiary – Estate

If the beneficiary of your Tax Free Savings Account is your Estate, the account would be subject to probate fees. The growth in the account from date of death to when the plan closes would be taxable to the estate.

TFSAs are great estate planning tools for wealth transfer—if used the right way. Should you have questions about TFSAs or estate planning, contact your wealth advisor.