Marriage and common-law partnerships are built on a foundation of love, trust, and shared dreams. While couples often focus on the joyous moments and shared adventures that come with these relationships, there are aspects that are less comfortable to contemplate, yet are equally, if not more, important. Among these, discussions about finances and the inevitable reality of death often take a backseat. Moreover, it's natural that when one spouse is more skilled or confident in handling financial matters, they may inadvertently assume the entire task, potentially leaving the other in the dark.
In this blog, we delve into the often overlooked but immensely significant topic of communication between married or common-law partners when it comes to financial matters and the eventuality of death. We'll explore why these discussions are so essential, and the potential pitfalls of neglecting them when one partner tends to take the financial reins. By the end, you'll understand why open and honest communication in these areas can strengthen your partnership, ensure both partners are informed, and provide peace of mind for both you and your loved one.
The Unpredictability of Life: Why Creating a Will is Essential
It's a scenario that many of us can relate to: the thought of creating a will often gets pushed to the bottom of the to-do list. Whether it's because we feel young and healthy or believe there's plenty of time ahead, procrastinating on this crucial task is a common yet risky oversight. The truth is, the unpredictability of life makes having a will an essential step in responsible financial and end-of-life planning. One of the primary reasons for creating a will is to protect and provide for your loved ones in the event of your passing. Without a will, the distribution of your assets and the care of your dependents can be left to the discretion of the legal system, which may not align with your wishes. This can result in unnecessary stress, family disputes, and financial difficulties for your surviving spouse, children, or other beneficiaries.
Bank Accounts and Beneficiaries: Avoiding the Probate Process
In the realm of financial matters and end-of-life planning, your bank accounts play a pivotal role. Often, individuals may not realize the importance of designating beneficiaries for their accounts, which can have a significant impact on how their assets are distributed after their passing. Designating a beneficiary for your bank accounts can help you bypass the often lengthy and costly probate process. When you specify a beneficiary, the funds in the account automatically transfer to that person upon your death, without the need for court intervention. This is particularly crucial for married or common-law partners, as it ensures that the surviving spouse can access these funds swiftly, providing financial stability during a challenging time. While joint bank accounts simplify many aspects of financial management for couples, they can also introduce complexities in the event of one spouse's passing, especially when debt is involved. When a deceased spouse leaves behind debt, the surviving spouse's access to the joint account can become complicated. In cases where there is no debt, joint accounts generally provide seamless access to the funds for the surviving spouse. However, if the deceased partner had outstanding debts, creditors may have the right to access the joint account to settle those debts, potentially leaving the surviving spouse with significantly reduced or even depleted funds. This situation can be distressing and financially challenging, underscoring the importance of understanding the financial landscape within your partnership.
Tax Implications of RRSP Withdrawal After Death
When an individual with an RRSP passes away, the RRSP is considered fully withdrawn, and the fair market value of the investments held within it is included in their income for the year of death. This amount is then taxed at the deceased person's marginal tax rate. This can potentially result in a significant tax liability that affects the estate and the beneficiaries. To mitigate the tax implications and provide financial security for surviving spouses or eligible beneficiaries, the Canadian tax system allows for an RRSP rollover or transfer to eligible survivors. This option enables an eligible beneficiary, typically a surviving spouse, to receive the deceased person's RRSP assets. The key point to note is that the rollover or transfer must occur before December 31 of the year following the year of death to avoid immediate taxation. When this process is executed correctly, the surviving spouse retains all the benefits of the RRSP, and no tax is payable at the time of transfer. This strategy ensures that the deceased person's hard-earned savings can continue to grow tax-deferred within the RRSP, providing financial security for the survivor.
Organizing Your Financial Life: The Importance of a Physical Binder
In the digital age, our financial lives have become increasingly paperless. Bank statements, investment reports, mortgage documents, and credit card statements are often stored electronically, and while this can be convenient, it can also present significant challenges when one partner passes away. To ensure that the surviving spouse has access to essential documents and information, creating a physical binder divided by key categories is a practical and crucial step.
Categories for Your Financial Binder:
Creating a financial binder is a proactive step, but it's not a one-time effort. Regularly update the information within the binder, especially when there are changes in your financial situation, such as opening new accounts or taking on additional debts. Additionally, make sure your partner is aware of the binder's existence and knows where to find it in case of an emergency. This brings up to the last topic of our blog.
The Power of Regular Couples' Meetings
Regular couples’ meetings are designed to promote transparency and shared responsibility in your financial journey and also end-of-life planning. It ensures that both partners are well-informed about the financial landscape, which is essential in the event of either partner's passing. One important item of discussion during the regular meetings is discussing the latest changes to and updating the physical binder which we spoke earlier. This will ensure that all information is current and accurate.
Choosing the right time for these meetings can make a significant difference in your financial planning. It is recommended to schedule these meetings at the least twice a year—once in May and again in November—for a couple of compelling reasons:
For further information or if you need to prepare a will, please visit the nearest Softron office or contact Softron at:
Telephone: 1-877-SOFTRON, Website: www.softrontax.com
Posted on 13 October 2023