First Published Summer 1992

The Registered Retirement Income fund, known as a RRIF, is the most popular option chosen when converting RRSP's into retirement income. In the past, most people would start with a RRIF and only convert to an annuity if interest rates warranted or they had to collapse their RRIF by age 90. The life annuity guaranteed an income for life and the taxman did not reap any rewards on death as the annuity often died with the owner.

The recent change to the "minimum withdrawal" requirement will now allow a RRIF to last until your death or your spouse's death under the rollover provision. The RRIF was (and still is) a perfect tax deferral in the early years if you withdrew only the minimum required; but the tax was punitive unless it was converted to an annuity in the later years. Now that the deferral period has been extended, many may never convert their RRIF unless interest rates warrant. The biggest drawback to the change is this new benefit could end up benefiting Revenue Canada more than your heirs.

The other change is the huge amounts that clients now have accumulated in their RRSP/RRIF accounts. Our average client is retiring with well over $100,000 in their RRSP's plus other investments and pensions generating income. Therefore, the sheer size of the RRIF balances will cause tax problems at death. In the past, most seniors retired with only their company pension plan, CPP and OAS and on their death none of these caused a problem for the estate.

Considering these changes, no wonder the RRIF will be the taxman's favorite choice as well. At death, if your spouse has predeceased you, the RRIF balance is fully taxable in your final tax return. When you consider that all your regular income has to be reported plus capital dispositions, etc, all on one tax return, more than likely the RRIF will be taxed at the highest tax bracket This means that almost half of it is left to the government.

Probate fees would apply on the RRIF if the estate were named as the beneficiary. Currently probate fees for B.C. for estates greater than $10,001 hove a flat fee of $100. If greater than $25,000, the fee is $100 plus $5 for every $1000 thereafter. Ontario just raised their probate tees to $5 per $1000 on the first $50,000 plus $15 for every $1000 over $50,000 will B.C. be far behind? One way to avoid probate fees is to have your RRIF with a life insurance carrier and have a "named beneficiary" other than the estate. Life Insurance products are not a probated asset and so you would avoid this cost.

For example, let's consider a couple retiring, he is 65 and she is 64. Based on actuarial figures she will outlive her husband and live to age 85. When a spouse dies, the RRSP/RRIF can be rolled over to the remaining spouse tax tree. At the death of the second spouse, the balance is fully taxable. At current rates of 8%, the $100,000 they put into a RRIF today, based on taking only the minimum withdrawal rates, would still be worth more then $114,967 when she dies. The government will enjoy approximately $56,333 of this.

One of the best solutions to this problem is to use some of the income produced by the RRIF to buy life insurance to cover the pending tax problem. For example, if this couple had bought a $50,000 life insurance policy on a last to die basis and withdrew additional funds to cover the premiums, the RRIF would still grow to $100,091 on her death. The insurance premium would be $59.87 monthly, assuming they are both non smokers. But, the after tax value to the estate is the full $100,091 which could be passed to the children, not the taxman. This is a $41,457 improvement over the first scenario.

If the retiring couple tried to save the same amount for the eventual tax bill by investing monthly to provide the same benefit to the estate at death it would take over 31 years (her age 95) on their own. This takes into consideration the investment income being taxed at a 40°/o tax bracket. This is long after their expected mortality so our couple would not have had enough time to save for the eventual tax bill.

In the past, insurance protection was viewed as a requirement only if you had a mortgage, dependant spouse or children to raise. Now, it is the most economical tool to use for estate planning. If you have insurance now, it is worth keeping. The "last to die" policies are much easier to get due to two lives being insured; so one person can be in poor health and still qualify for this type of policy. Some of my clients' children feel it is to their benefit to even pay the life insurance premiums themselves to ensure that they will inherit the RRIF tax free. Consider this solution even If you are single. You could name your favorite charity, niece or nephew to be the beneficiary so they could receive your RRSP/RRIF tax free.

Insurance policies can be purchased where the premium is solely based on the pure cost of insurance and do not build any cash surrender value. Others that do build cash values can give the purchasers other planning opportunities. These can he 'paid up' within a very short period and are more cost effective over the long term. As well, if the couple spent all the RRIF during their lifetime and no longer need the insurance protection they could cash in the policy and enjoy the monies themselves. They would normally, receive back all the premiums paid plus interest.

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About the Author
Marie T. Baigent, CFP, CLU, CHFC, RFP. Prior to entering the financial planning profession Marie held a management position with Revenue Canada-Taxation. Her twenty plus years experience with them has proven to be a tremendous asset in assisting her clients to effectively plan their taxes. Marie is also a Certified Financial Planner, a Chartered Financial Consultant, a Chartered Life Underwriter and a Registered Financial Planner.