Estate Planning: RRSP and U.S. spouse

DallasBill · Post by **DallasBill** » Thu Jun 05, 2008 3:29 pm

I'm looking at estate planning right now (due to illness) and am unsure of how my RRSP would be treated for my wife should I pass away before her. She is a U.S. citizen and has never lived in Canada. She is the beneficiary listed with TD Waterhouse (and in the will). Upon my death, what happens? Does it pass to her and she would be under the same tax guidelines upon its collapse as if I did it were I alive?

I'm also considering collapsing it (with the dollar being strong), taking the 25% hit, and then we/she can deal with it much more simply down here, right now. She's not the type to want to deal with cross-border tax issues every year for decades. It's worth north of 400k and we/she do not need it for at least 10 years.

nelsona · Post by **nelsona** » Thu Jun 05, 2008 3:49 pm

Remember that US will not tax RRSP income beyond what Cdn govt does.

So, if you bequeth your RRSP to your spouse, this gives rise to NO income in canada, thus no income in US.

She would then take over the RRSP, with the same cost basis that you had had you not died. (which is book value upon arrival in US MINUS the taxable portion of any withdrawls made as a US taxpayer)

There is of course estate taxes to deal with, but the fact that SHE is a US citizen would likely make your entire estate tax-free (if you give it to her). The reverse, she dies and you are not citizen, her RRSP would likley cause her estate to hit a limit.

nelsona · Post by **nelsona** » Thu Jun 05, 2008 8:50 pm

... and to your idea that it may be time to collapse RRSP due to high $ value, there is no need to do this to 'lock in' high dollar. Simply move your investments to foreign investments within the RRSP (there is no longer any limit) and this will effectively ensure that your RRSP will not be affected by falling C$.

As to whether or not C$ has peaked vs US$, that is a matter to be discussed elsewhere.

DallasBill · Post by **DallasBill** » Fri Jun 06, 2008 6:36 pm

I'm a little confused. Bequeathing the RRSP to my spouse gives rise to NO income in Canada and thus none in the US I understand. I also understand about cost basis.

She is a US citizen and so am I (dual w/ Canada) so am I my estate would be tax free to her because it would be under the max. limit here.

So, are you saying that she could collapse the inherited RRSP tax free from Canadian fingers? Or would she be taxed by Canada on it somehow? That's the part I'm unclear on.

nelsona · Post by **nelsona** » Sat Jun 07, 2008 6:34 am

The BEQUEST gives rise to no tax. But by this I mean a TRANSFER of the RRSP to her intact.

However, if she would subsequently WITHDRAW the RRSP, she will pay Cdn (flat 25% for a collapse or 15% is she took it as a periodic pension) and US tax (based on YOUR cost basis).

As I said: "She would then take over the RRSP, with the same cost basis that you had had you not died. " So, if there if right now you would be on the hook to IRS for $200K of your RRSP (basically its growth since you became a US resident or citizen), then so would she now be.

There is no getting around (a) CDn tax on the entire RRSP at some point, nor (b) US tax on your (and then her) growth portion

nelsona · Post by **nelsona** » Sat Jun 07, 2008 6:48 am

.. if you will stated that YOU collapse your RRSP and give it to her (or if you bequested to anyone else) then this would be considered income for you, and give rise to the 25% TAX and the US tax immediately upon death.

DallasBill · Post by **DallasBill** » Sat Jun 07, 2008 8:58 am

Thanks a lot, Nelson... got it!