Can You Keep an RRSP or RRIF in a Spousal Trust?

If you want to ensure that your spouse will provided secure inheritance of certain assets in the event of your death, a spousal trust is one of the most practical family estate planning tools for the job. However, the transfer of some assets to a spousal trust may not be appropriate. Let’s consider RRSP and RRIF accounts.

Understanding Spousal Trusts

A testamentary spousal trust offers a number of advantages when planning your legacy. Firstly, assets placed into a spousal trust will be inherited by the surviving spouse on a tax-deferred basis. In addition to this, the surviving spouse will benefit from protection of the assets settled into the trust against creditors, or in the event that they remarry and divorce, matrimonial claims as well. The testator can also set in place specific provisions regarding how the assets will be made available, and upon the death of the surviving spouse, which children or other individuals will receive the remaining capital. This can be particularly useful in the case of blended families.

Leaving Behind an RRSP or RRIF

Considering the above tax planning and asset protection benefits, is it a good idea to leave your RRSP or RRIF account to your spouse through a spousal trust? The answer is usually no. By default, RRSPs and RRIFs have the benefit of spousal rollover — the spouse named as the beneficiary will inherit the funds with no immediate tax burden. However, if an RRSP or RRIF account is placed into a testamentary spousal trust, it loses this advantage and is taxed as regular income prior to settling into the trust. It’s therefore not generally recommended to pass these accounts through a spousal trust unless specific needs or circumstances call for it.

What About TFSAs?

Do the above factors also apply to a tax-free savings account? Not quite. When transferred into a spousal trust, a TFSA will not be subject to the same immediate taxes as an RRSP or RRIF. However, once in the trust, those savings will no longer accumulate tax-free. This tax-free status will only be retained if directly rolled over to your surviving spouse. Ultimately, whether or not you place one of these accounts into a spousal trust depends on whether your priority is to minimize immediate tax burden or exercise certain asset protections. Your family estate planning specialist can help you choose the right strategy for you and your spouse.