What happens to my RRSP when I pass away? What happens to my RRSP when I pass away without a will?

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What are the rules concerning the transfer of money in and out of a spousal RRSP?
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We want to start saving for our children's post-secondary education. What are our options?
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If index funds seem to continuously outperform actively managed equity mutual funds, why buy an actively managed equity fund and pay a higher annual management fee?
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What happens to my RRSP when I pass away? What happens to my RRSP when I pass away without a will?

‘Blue-Chip’ Expert: When you pass away a number of things can happen to your RRSP/RRIF. If you have designated a beneficiary of your RRSP/RRIF in your application form or by your will, the named beneficiary will receive the proceeds of the RRSP/RRIF on your death. If the named beneficiary is your spouse, the RRSP/RRIF can be "rolled" or transferred without any immediate tax consequences (you may have to pay probate fees if the beneficiary designation is done by your will). You may also obtain a tax deferral by naming a financially dependent child or grandchild under the age of eighteen as a beneficiary of your RRSP/RRIF or as a beneficiary of your estate in your will. If a spouse or a financially dependent child or grandchild does not receive the RRSP/RRIF at the time of death, the RRSP/RRIF must be reported as income in the final income tax return of the deceased and may be subject to probate fees with possibly up to 50% of the value of the RRSP/RRIF subject to taxation. A number of estate and tax planning opportunities are available which can reduce such taxation.

If you pass away without a will, or without completing a beneficiary designation form in regard to your RRSP/RRIF, then you have died intestate and your estate and RRSP/RRIF will be distributed according to the laws of the province in which you reside, with possible negative tax consequences and distribution of your estate without consideration to any of your specific wishes.

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What are the rules concerning the transfer of money in and out of a spousal RRSP?

‘Blue-Chip’ Expert: You can contribute whatever portion you like of your own RRSP contribution room to a spousal RRSP. Thus you can make the maximum allowable contribution either to your own plan or the spousal plan, or a combination of the two. You can transfer funds from your RRSP to a spousal RRSP on a tax free basis in two circumstances: first, on your death, provided your plan has not matured and your spouse is named as beneficiary and, second, in the case of marriage breakdown where you and your spouse are no longer living together and a court has ordered the division of your RRSP. If the holder of a spousal plan cashes it in during the year a contribution was made or in the prior two years, the contributing spouse will be liable for any resulting tax. Even if spousal contributions were made more than three years ago, the withdrawal will be treated as the contributor's income. And, even if the spousal plan contains contributions made by both spouses and the holder of the spousal plan withdraws only part of the funds, the contributing spouse will still pay tax on any amounts up to the amount of contributions made during the year and the last two years. Your spouse cannot withdraw money directly from your RRSP per se. In some cases such as death, or marriage breakdown, some or all of your RRSP assets could be rolled directly into your spouse's RRSP and then withdrawn.

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We want to start saving for our children's post-secondary education. What are our options?

‘Blue-Chip’ Expert: While RESP (Registered Education Savings Plan) contributions are not tax deductible, they do offer a long-term tax advantage. All capital contributed to the plan grows tax-free until your beneficiary becomes entitled to the savings or the plan is otherwise collapsed. When the beneficiary takes educational assistance payments towards post-secondary education, the payments are taxed in the beneficiary's hands. Annual contributions are limited to $4,000 per child, with an aggregate ceiling of $42,000 per child. Under our tax laws, the subscriber to an RESP may make withdrawals at any time.

Contributions to an RESP made after January 1, 1998 are also eligible for a Canada Education Savings Grant (CESG) equal to 20% of the first $2,000 contributed each year.

Other options available to you would include formal trusts and "in trust" accounts. Setting up and maintaining a formal trust can be costly, when considering the legal and accounting fees associated. This option is normally used where large sums of money are involved. Remember that once the money is in this account it belongs to the child and he/she has the right to it for any purpose at the age of majority. Any interest or dividends generated by an in-trust account are attributed to the contributor, while capital gains are taxed in the hands of the child.

Whether you use an RESP, in-trust account, or both, seeking professions advice will ensure that the accounts are properly set up and structured to meet your particular objectives.

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If index funds seem to continuously outperform actively managed equity mutual funds, why buy an actively managed equity fund and pay a higher annual management fee?

‘Blue-Chip’ Expert: Index funds have grown in popularity over the past few years, primarily for their lower management fees. Not all index funds out-perform actively managed funds on a consistent long term basis.

The S&P; 500, which has long been regarded as the toughest index to beat, has under performed certain actively managed funds over the past few years, because active managers have the benefit of over weighting sectors. This flexibility to change the sector weighting gives talented, active managers a distinct edge.

Another reason to seek active managers is to benefit from risk management. The active manager can also choose to underweight the undesirable areas for the market. The active manager can be more prudent in asset allocation weightings.

Stock market talent has to be paid and there are many benefits to be derived from talented managers.

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