Don’t inherit a crisis: How to manage a parent’s debt before they pass + MORE Mar 13th

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For Canadians relocating to the United States, one retirement question surfaces repeatedly: what happens to a locked-in RRSP?

Locked-in retirement accounts, commonly known as LIRAs, are designed to preserve pension money for retirement. But under certain circumstances, leaving Canada can create an opportunity to access those funds earlier than expected. The key is understanding that the rules are statutory, jurisdiction-specific, and far from uniform.

Why locked-in accounts exist

Locked-in RRSPs typically arise when an employee leaves a workplace pension plan—either defined benefit or defined contribution—and transfers the commuted value into an individual account. Unlike a standard RRSP, the funds are governed by pension standards legislation rather than solely by the Income Tax Act.

The purpose is straightforward: pension assets are meant to provide retirement income, not be withdrawn prematurely. As a result, access is restricted. At retirement, funds must generally be converted into a Life Income Fund (LIF) or similar vehicle, which imposes annual minimum and maximum withdrawal limits…

For many families, the grief of losing a parent is compounded by a harsh and unexpected reality: a messy financial aftermath. Amidst mourning, loved ones may suddenly find themselves facing a daunting array of bills, taxes, and legal duties they are unprepared to handle. The topic of inherited debt, often misunderstood, can turn a difficult time into a financial crisis.

Many people assume that debt simply vanishes upon death, but the reality is different. Experts say the key to navigating this challenge lies not in searching for legal loopholes after the fact, but in proactive planning, clear communication, and a solid understanding of the system before it becomes necessary.

Inherited debt stays with the estate, not with beneficiaries

Before diving into estate planning, it’s crucial for families to grasp a fundamental principle: in Canada, you do not personally inherit a parent’s debt. 

“When an individual passes away, inherited debt usually ends up in the deceased’s estate with their assets, which the executor must administer in the best interest of all beneficiaries,” said Katie Kaplan, partner at BDO Canada…