What happens to your TFSA when you die

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This is how a TFSA gets distributed in the event of a death, plus, info on making sure it is not subject to probate.

What happens to your TFSA when you die

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I hope I can get this question answered because I am unable to get a definitive answer when I scour the internet. My broker allows me to complete a TFSA form as follows:
Successor:  Spouse
Beneficiary # 1: Daughter, 50%
Beneficiary # 2: Son, 50%
Here are my questions:
1. If the account holder dies and the spouse is alive, does 100% of the TFSA go to the spouse?
2. If both the account holder and spouse are deceased, does the TFSA essentially get liquidated and split evenly between the daughter and son?
3. Is there probate tax in either scenario above?
—Ian

Do TFSAs have beneficiaries? Do TFSAs have successors? 

Tax-free savings accounts (TFSAs) in all provinces and territories, other than Quebec, allow the naming of successor holders or beneficiaries. In Quebec, your TFSA must be payable to your estate, and the beneficiaries of a registered account must be dictated by your marriage contract or your will. 

And only a spouse can be named as a TFSA successor holder. A successor holder takes over a TFSA account when the spouse dies, and the account becomes their TFSA. It remains tax free, does not impact their TFSA room, and avoids probate or other estate administration costs. The account can remain separate or be consolidated with their own TFSA. The financial institution will generally just require a death certificate. 

So, given you have named your spouse as successor holder, Ian, it would go 100% to your spouse upon your death.

If your spouse predeceases you, the beneficiary designations would apply. The account would be divided between your children equally, Ian. 

If a spouse is named as beneficiary instead of successor holder, they can still take advantage of a tax-free rollover to their own TFSA. However, any growth in the TFSA account after death would be taxable income. A transfer of up to the date of death market value of their deceased spouse’s TFSA can be made to their own TFSA without impacting their TFSA room. It must be done by December 31 of the year following death in order to qualify as an exempt contribution.  

What if your TFSA doesn’t have a successor named?

It should be noted that for those who opened TFSAs right away when they were introduced in 2009, their financial institution may not have given them the option to name a successor holder–perhaps just a beneficiary. It may be worth double-checking now and appointing a spouse as successor holder assuming that is your wish.

If you do not name a successor holder or a beneficiary for your TFSA, your TFSA is payable to your estate. 

Probate taxes and inheriting a TFSA

When a registered account, like a TFSA, is payable to a named successor holder or beneficiary, probate or estate administration tax is not payable. Probate or estate administration tax is payable to the province or territory on certain assets that make up the estate of a deceased and are distributed by their will, which generally includes assets without named beneficiaries. 

Naming children or the estate as TFSA beneficiaries 

It bears mentioning, Ian, that if your children are minors below the age of majority in your province or territory of residence, there may be drawbacks to naming them as beneficiaries of your TFSA. If you and your wife both died and the children were entitled to the TFSA proceeds as minor beneficiaries, the account may become payable to their court appointed guardian (likely whomever you named in your wills) or the Public Guardian and Trustee (a provincial or territorial agency). 

Both would be responsible for managing the funds until your children attained the age of majority, at which point, their share would be paid to them. 

It may be preferable to name your estate as beneficiary instead of to your minor children so the more detailed and specific terms of your will would apply. This may include a trustee for your children’s assets and instructions for how those trust funds should be administered, used, and distributed to your children, terms normally included in a will for an executor with minor children. 

Even if your children are above the age of majority, another reason to consider naming your estate as beneficiary instead of your children is in the event one of your children died at the same time as you or predeceased you. If a TFSA beneficiary has predeceased, their share of a TFSA is generally payable to the other TFSA beneficiaries. 

You may think you would simply change your beneficiary designations if something happened to one of your beneficiaries, but that may not always be possible. Imagine a situation where you become incapacitated due to dementia. One of your children passes away during the period of your incapacity. If you were able to, you might change your TFSA so that 50% was payable to your surviving child and the other 50% payable to your deceased child’s children (your grandchildren). 

If you were incapacitated, you could not change your beneficiaries. Someone acting as a power of attorney for property cannot change your beneficiary designations either. This is one benefit of naming your estate as beneficiary instead of your children, albeit at the cost of paying probate or estate administration tax and a slower estate settlement process. 

Final thoughts

In summary, Ian, based on the information provided, your TFSA would be taken over by your spouse as successor holder on your death. If your spouse died, it would be payable to your children as beneficiaries. In neither case would probate nor estate administration tax apply. Hopefully, your question and my input prompts some thinking around TFSAs, tax, and estate planning for other TFSA holders out there as well. 

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

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