Gifts of RRSPs/RRIFs by Direct Designation

Directly designating a charity as the beneficiary of a registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) has a number of advantages, but also a risk.

A direct designation gift is arranged by naming one or more charities on the RRSP/RRIF plan documents. After the death of the plan owner (normally the second spouse post spousal rollover), the plan trustee pays the balance of the RRSP/RRIF directly to the named charity/ies.

The advantages include: 1) a tax credit that can claimed by the estate against up to 100 percent of net income on the final two lifetime returns; 2) the ability to pass assets outside the estate for the purposes of probate (hence no probate fee); 3) retention of the full value of the RRSP/RRIF for charity that would have been taxed at a high rate if gifted to family. From a psychological perspective it is often easier to donate a highly taxed asset that is declining in value, as mature RRIFs do, than other estate assets.

The risk comes from treating the gift of RRSP/RRIF assets in isolation without regard to the will. Plan documents are easy to change. An uncoordinated gift can create unintended consequences in the overall estate plan, so it is advisable to make a direct designation gift at the same time as a comprehensive estate plan and will review.

The new “estate donation” rules that come into effect in 2016 apply to RRSP/RRIF direct designation gifts. In many cases they will increase the tax effectiveness of these gifts. Under the new rules, gifts will be receipted for the value of the amount transferred to charity and claimed over up to five years: the final two lifetime returns as well as first 36 months of estate returns. The plan trustees needs to transfer the remaining assets within 36 months of the death of the donor to ensure the executor can use the full five-year claim period.