Leaving RRSPs to kids

Q: I am 61 years old. My wife and I have over $200,000 in RRSPs. We plan on leaving our RRSPs to our children.

I heard that almost half of the value would go towards income taxes when we die. Can I buy insurance and what would it cost?

-- Nick G.

A: Typically, spouses name each other as beneficiaries to each other's RRSPs. There is a tax-deferred rollover if you name your spouse, a minor child or a disabled dependant.

At the second death, there is a deemed disposition of the residual amount in the RRSP/RRIF and would be taxed as income on that individual's final return. If you are insurable, you could look into purchasing an insurance policy.

I would recommend that you name your children as the beneficiaries, as the proceeds will not only be paid out tax-free but would also avoid probate fees. Your estate would pay the tax liability on your RRSPs, but the insurance proceeds would make up for it.

Insurance quotes depend on age, gender and smoker status. Actual costs are based on insurance company approval after medicals are done. You can consider a joint-last-to-die policy with your spouse, which may reduce the insurance cost.

A financial advisor can assist with working out a strategy that makes sense for you.

-- Winnie Go, FMA is a Senior Investment Executive with ScotiaMcLeod and part of the Scotia Private Client Group. To ask Winnie a question about investing, retirement & financial planning, and estate & tax planning, please write to winnie_go@scotiamcleod.com

This article is for informational purposes only. Always consult a financial advisor before making decisions based on this advice. The opinions stated are not necessarily those of Scotia Capitalor The Bank of Nova Scotia.