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Advance planning and avoiding major decisions until after the mourning period are among the keys to navigating hard times

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The passing of a spouse is always a difficult time, and it can leave a survivor feeling lost and lonely. Inevitably, there are financial implications to address. Here are some of the key considerations.

Assets

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Most jointly held assets and registered accounts with spousal beneficiary designations can be transferred to a surviving spouse relatively quickly with only a death certificate and without the requirement to apply for probate. This is one reason for spouses to consider holding accounts and real estate jointly with rights of survivorship and naming spousal beneficiaries.

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These transfers generally happen on a tax-deferred or tax-free basis to the surviving spouse. RRSPs can remain tax deferred, TFSAs can remain tax-free, and non-registered assets, private company shares and real estate can generally be transferred at the adjusted cost base with no capital gains triggered.

A survivor may need or want to change their investment strategy. The strategy may need to change because income or expenses have changed for them. They may want to change the strategy, particularly if the deceased spouse was primarily responsible for the investments. The survivor’s risk tolerance or investment knowledge may be different and may support a change to the investments or investing process.

Decisions with a home should not be rushed. If a survivor is in a situation where they cannot afford to maintain a home, or they are having a hard time being in the home alone, the desire to move may be more pressing. But to the extent a potential move can be deferred until time has passed for mourning, a survivor may be able to make a better long-term decision.

Pensions

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Workplace defined benefit (DB) pension plans typically pay a survivor benefit. When you elect to begin your DB pension payments, you are generally provided with payment options to select for your spouse if you die before them. A normal form pension might have a 50 per cent, 60 per cent, or 66.67 per cent survivor pension, for example.

Some plans allow a higher survivor benefit of up to 100 per cent or even the option to waive the survivor benefit entirely under some circumstances. The higher the survivor pension percentage, the lower the monthly payment when the pension begins. A higher survivor option is sort of like buying a life insurance policy of sorts, and because of that protection, the pension payments are decreased slightly as a result.

If your spouse dies before beginning their pension, the plan may offer an immediate survivor pension, a deferred survivor pension, or a lump sum payment called a commuted value. The lump sum may be partially taxable with the ability to shelter some by transferring it to a locked-in retirement account (LIRA).

The Canada Pension Plan (CPP) has two different potential payments for surviving spouses. One is the CPP Death Benefit which is a lump sum payment of $2,500 as long as the deceased made sufficient CPP contributions during their working years.

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In addition, a surviving spouse may qualify for a CPP survivor’s pension. For survivors under 65 years of age, there is a flat rate portion of $197 per month plus 37.5 per cent of the contributor’s retirement pension. For those over 65, the pension is 60 per cent of the contributor’s retirement pension. However, if you are receiving other benefits, you may receive less. A spouse who is already receiving the maximum CPP retirement pension, for example, will not receive any survivor’s pension.

Old Age Security (OAS) pensions rarely pay anything to a survivor. If you are a surviving spouse between 60 and 64 living in Canada who has not remarried, you may be entitled to an Allowance for the Survivor. Your income needs to be below the maximum annual income threshold of $28,782 for 2023.

Estate planning

A will and powers of attorney may not need to be updated after the death of a spouse. These estate planning documents tend to have replacements named beyond a spouse including children or other family members. Regardless, the death of a spouse is a good prompt to revisit estate planning documents.

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Spouses tend to name their spouse as the beneficiary of their insurance policies and registered accounts. There may or may not be contingent beneficiaries. After the death of a spouse, the survivor should consider whether to name their children or other family members as direct beneficiaries or to name their estate so their will can deal with the division of assets on their death.

Naming an estate as beneficiary can allow more specific instructions for an inheritance in the deceased’s will, while naming individuals as beneficiaries can speed up the estate settlement process and avoid probate fees and related costs.

Surviving spouses should think twice about adding children’s names onto assets like bank and investment accounts or real estate. Doing so can have unintended consequences like giving a child access to the assets, exposing assets to creditors or family law claims, or inadvertently causing tax implications for the family.

Trusted contact person

Securities regulators introduced the concept of a trusted contact person (TCP) in recent years. A TCP is like an emergency contact you authorize your investment firm or advisor to contact on your behalf in limited circumstances. Some instances might include when you are travelling and unavailable, if there is suspected fraud or exploitation, or if there is a concern about your mental capacity.

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They cannot make investment decisions about your account nor is a TCP the same as a power of attorney or executor. Someone who has lost a spouse, especially if they are older, should consider naming a TCP for their accounts if they do not have one already.

Summary

There tend to be limited immediate tax implications following the death of the first spouse. Their pension income may decline, and having all income on one tax return instead of two can lead to a higher tax rate.

Life events are always a time to reconsider estate planning and the death of a spouse is no different. Considering a literal trusted contact person, or just reconsidering which family members or professionals to look to for support, is advisable for widows and widowers. To the extent they can, survivors should avoid making rash money moves and take time to mourn before any big financial decisions.

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Jason Heath is a fee-only, advice-only certified financial planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever. He can be reached at [email protected].

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