A rollover of funds from an RRSP to an RDSP is another option for estate planning although there are a few limitations that you need to be aware of.
Firstly, a rollover is an indirect tax-deferred transfer of certain amounts to an RDSP beneficiary’s plan. Rollover amounts must originate from a Registered Retirement Savings Plan, Registered Retirement Income Fund, or Registered Pension Plan of an RDSP beneficiary’s parent or grandparent. Such amounts may only be rolled over if the RDSP beneficiary was financially dependent upon the parent or grandparent at the time of the parent or grandparent’s death because of a mental or physical infirmity.
Here are some reasons why it makes sense:
- If funds from an RRSP are willed directly into the hands of the beneficiary, the funds are first subject to full taxation before being passed on.
- A direct transfer of funds will trigger a Persons with Disability (PWD) clawback effectively nullifying the transfer.
- A rollover to an RDSP is much easier to administer than a discretionary trust.
- The rollover funds are transferred without triggering taxation. Inside the RDSP, the funds continue to accumulate tax free until funds are withdrawn at which time they are subject to taxation in the hands of the beneficiary.
- In the case of a grandparent this can be an effective way to pass on funds in a tax efficient manner without affecting the individuals Disability Assistance payments.
There are a few limitations that you need to be aware of:
- A rollover is subject to the maximum $200,000 lifetime contribution limit to an RDSP.
- A rollover will not attract a Canada Disability Savings Grant.
- Once the plan has received the maximum contribution limit, no further Canada Savings Grants are possible.