Naming your children as beneficiaries to investment accounts can be a tempting option for many Canadians.
It seems like a straight forward way to ensure your hard-earned money is passed down to your loved ones after you pass away and, on the surface at least, seems like a way to avoid paying tax.
However, there are significant risks associated with naming your children as beneficiaries, and it's important to carefully consider these risks before making any decisions.
One of the primary risks of naming your children as beneficiaries to investment accounts is it can lead to family conflicts and legal battles. Even in families with strong relationships, estates can create resentment and jealousy. In some cases, family members may even contest the beneficiary designation in court, leading to costly and time-consuming legal battles.
Another risk of naming your children as beneficiaries to investment accounts is it can have tax implications. In Canada, there is no inheritance tax, but there are still taxes that must be paid on investments that are passed down to beneficiaries.
If you name your children as beneficiaries, they will be responsible for paying taxes on any gains made on the investments. Depending on the size of the investment, that could be a significant tax burden that your children may not be prepared to handle.
Additionally, naming your children as beneficiaries to investment accounts can put their financial well-being at risk. If your children are minors at the time of your death, they will not be able to access the funds until they reach the age of majority.
In some cases, this could mean that the money sits in the investment account for many years, potentially losing value over time. Even if your children are adults when you pass away, they may not have the financial knowledge or experience necessary to manage a significant investment portfolio.
Finally, naming your children as beneficiaries to investment accounts can also put your estate at risk. If your children have outstanding debts or are going through a divorce, their inheritance could be seized to pay off these debts or be divided in a divorce settlement.
That could mean that your hard-earned money is not passed down to your loved ones as you intended.
So, what are some alternatives to naming your children as beneficiaries to investment accounts? One option is to create a trust.
By setting up a trust, you can dictate how your assets are distributed after your death. You can also name a trustee who will manage the assets on behalf of your beneficiaries, ensuring that the money is used wisely and in accordance with your wishes.
Another option is to name your estate as the beneficiary. While this may not be the most tax-efficient option, it can give you more control over how your assets are distributed. You can dictate how your assets are distributed and ensure that your loved ones are taken care of after your death.
Ultimately, the decision of whether or not to name your children as beneficiaries to investment accounts is a personal one that should be made after careful consideration of the risks and benefits.
While naming your children as beneficiaries can be a simple and straightforward way to pass down your assets, it can also create family conflicts, tax implications, and financial risks.
By exploring alternative options, and getting customized advice from a certified financial planner, you can minimize estate taxes while also ensure that your assets are distributed in accordance with your wishes and that your loved ones are taken care of after your death.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.