What Happens To Your Finances At Death? (Pt. 1)
Today were going to take a stroll in one of the more darker corners of personal finance – what happens to your finances at death.
I understand that this can be an emotional topic – so please consider skipping this episode if you’re not in the right frame of mind.
Also, as a reminder – All notes for today’s episode will also be available on the show notes website. I’ll also include some helpful links and resources.
Why It’s Important
Understanding what happens to someone’s finances when they pass away is really important to include in a comprehensive financial plan. Taking advantage of this knowledge can simplify the process and avoid charges from taxes and probate. You’ll also need the information if you manage an estate as an executor, and help guide others through the process.
We’re going to break the topic into three episodes – first what happens to your assets and debts at death, the final taxes and finally how the estate works. During the whole way I’ll also be offering advice on ways to simplify the process and save on expenses.
Importantly, this is a complexed topic and it’s recommended that you speak to a regional professional to guide you with your specific needs.
The Process and The Importance of Wills
So, the process at death can take many different paths. Your province or territory, amount of assets held and more will shape the process. A big consideration is if you have a legal and valid will – we’ve talked about it quite a bit on past episodes, but one can pass away with or without one. Having a properly made will allows the process to move much smoother than if a person passes away without one – which is called intestate.
One of the first step is that a legal representative must be identified – if you have a legal will, this will usually be your executor – possibly plural and if you pass away without a will, then a legal representative must be appointed as an administer of the estate by a court.
In some cases, spouses, family members and close friends can provide information to financial institutions but will often not be able to find out about any confidential information until they are classified as a legal representative. Importantly, if they are listed as a beneficiary or joint with rights of survivorship then parts of the estate process is sidestepped.
You also want to make sure that your executors know that they are listed and that they are comfortable with the process.
The representative will have quite a few responsibilities including notifying relevant financial institutions about the death, contacting the CRA and providers of any income like pensions, and completing your final tax return. After that, they will have to manage your estate.
The legal representative should start by collecting all information they can about assets, debts and income sources and the market value at death.
Sometimes this can be challenging to find out – especially if the deceased has lots of accounts all over the place.
A good place to find this information is by looking through banking activity to see where the sources of income are coming from or going to and their past income tax returns with tax slips to see if they have any taxable assets.
The representative should contact all sources of income – like pension providers, government departments, and more. If these providers make a payment after death then these payments will usually have to be paid back.
The CRA also needs to be notified
So What Happens To The Assets?
There are many different rules when it comes to assets and understanding how each asset class works is invaluable. We’ll cover some of the most common types.
First of all, bank accounts – if the deceased has a joint account with rights of survivorship then that account will usually get immediately passed to the other account holder as they are considered to be a legal owner. There are cases where this has been rejected by courts but this is generally the case.
So this is the first big trick to avoid estate proceedings and probate. Simply make an account joint with rights of survivorship – of course, you need to trust the person added to the account as they will legally have access to the funds.
Accounts just under the deceased’s name will become part of the estate.
Next down the chain are TFSAs – This awesome investment vehicle is very agile when it comes to estate planning. The key here is to designate a beneficiary or successor.
If a spouse is listed as a successor then the full balance of the TFSA can be transferred into the their TFSA even if they don’t have the contribution room as it’s considered to be an exempt contribution.
If a beneficiary is listed then they are eligible for a tax-free lump sum payment, however if the TFSA increases in value after death, then the beneficiary will have to pay taxes on that amount. If a spouse is listed as a beneficiary, they can also roll over the amount to their TFSA within a specified exemption window but they will still have to pay taxes on any increased value.
In no beneficiary is listed then the TFSA is paid out to the estate.
The process with RRSPs are similar but more tax heavy. The full value of the RRSP can be transferred over to a spouse and added to their RRSPs – dependent children or grandchildren can have it taxed in their hands or placed in an annuity until they turn 18.
If you have another beneficiary that isn’t a spouse or dependent child or grandchild then the process is a bit complicated. The full value of the RRSP is taxed on the deceased final taxes and then paid out afterwards. We’ll talk more about that next episode, but this can heavily reduce the amount left over for the beneficiaries.
Again, if no beneficiary is listed in the estate then the full balance will be taxed and added to the estate – although beneficiary information can also be included in the will.
Other common assets include workplace pensions. The rules can vary heavily and depend on how the workplace pension was set-up and what type of pension it is. In many cases, the rules will also differ if the deceased passed away before they began receiving their pension or after. Here, common outcomes will include a survivor’s pension to the spouse or any dependant children, a lump sum payment from the plan, a deferred pension and more. It’s important that you know the rules of your pension and plan accordingly in advance.
When it comes to non-registered accounts held just under the deceased’s name, those will be payable to the estate and in some cases can incur taxation. For example, non-registered stocks held under a single name are deemed to be sold at death with the capital gains applied on the final taxes. This something that we’ll talk about next time.
What About Debt?
What happens to debt? Well, the legal representative should immediately notify the issuer whom will then begin processing the request – if the account is joint it will usually be transferred over to the other account holder and if it’s just under the deceased’s name then it will be settled by the estate.
If there are not enough assets to cover the debt then the debt is usually considered to be settled.
So that’s it for today – but many experienced individuals will aim to minimize the assets that go through their will. This allows the process to be quicker, avoid probate fees, reduce the workload for executors, and even avoid having to repay debt payable by the estate.