How old you are can make a difference
If your grandchildren are of legal age and responsible for receiving an inheritance directly, they can be named as beneficiaries in a registered plan or insurance policy, or as beneficiaries in your will. (The Best Life Insurance In Canada: Your Complete Guide.)
If they are under the age of 18 or have reasons that should not directly preserve their inheritance, such as a disability, drug problem, or other concern, their inheritance can be held in trust.
You can designate a trustee in your will to hold assets in trust for your beneficiaries. An ideal trustee for a grandchildren’s trust might be their parents, and if you have grandchildren from more than one family, you can designate different trustees for the different trusts.
A trust can have a limited duration, for example until the beneficiary reaches a certain age or for a certain number of years after your death. Some trusts can last for the lifetime of the beneficiary, such as a Henson trust for a disabled beneficiary. A Henson trust is designed to ensure that funds are available to provide for the beneficiary but help them qualify for government assistance that may be lost due to asset or income limits. (What is the difference between will and trust?)
What is a qualified disability fund?
Qualified disability foundations that arise in the event of the death of a natural person and for a disabled beneficiary also benefit from special tax treatment. The income of the trust is taxed like an individual taxpayer with graduated marginal tax rates, which enables an income sharing between the trust and the beneficiary. This differs from other testamentary trusts, which are taxed at the highest marginal tax rate. (How to Open a Registered Disability Plan – aka RDSP.)
If your child or grandchild is disabled, your RRSP / RRIF can be carried over to their RRSP / RRIF or RDSP to defer taxes for many years without paying taxes on their withdrawals in the event of death and future taxes.
The fortune you can leave the grandchildren: money, savings and more
If you designate a grandchild as the beneficiary of a particular asset, you should be aware of the tax consequences. Some assets, such as a souvenir or a car, may not be taxable but may be subject to provincial or territorial estate or estate tax. Others, like a Cottage or Registered Retirement Plan (RRSP) and / or Registered Pension Fund (RRIF), may have to pay taxes. The tax is owed on the deceased’s estate. So take into account the reduction in the remaining estate value if you leave a certain fortune to a grandchildren.
A tax-exempt savings account (TFSA), RRSP, RRIF or similar registered account can have a grandchild as a beneficiary. If you are named as a beneficiary, the account will be transferred directly to a grandchild outside of your estate. Likewise with an insurance policy.