Beneficiary Designations – Making Sure Your Money Goes Where You Want

Nov 20, 2022

We work hard all of our lives. This hard work allows us to afford a home, maybe splurge on a few vacations, save a few dollars and when we pass, transfer our wealth to those we love, whether they be immediate family or a specified individual(s). Normally, this transfer can be done quite simply with a will or a beneficiary designation in the case of a registered plan and/or life insurance policy.  

However, designating a beneficiary for a life insurance policy just became more complicated with a recent Ontario Superior Court case, Calmusky v Calmusky. In this case, the deceased father had a joint account with one son, Gary, who was also named as the beneficiary under the deceased’s Registered Retirement Income Fund (RRIF). The other adult son, Randy, was not too happy that these assets went directly to Gary and took the case to court, stating that the bank account and the RRIF were held in trust for the estate of the father.  

The court decided that, based on case law, a joint bank-account should be held in trust for the estate when it results from a gratuitous transfer of an asset to an adult child, unless the child can prove that it was the deceased’s intention to gift the asset to them directly. So far so good: bank account = trust, unless there is solid proof stating otherwise.

However, this is where things get a little murky. The court then went on to apply this very same principle to the RRIF beneficiary designation, regardless of legislation already in place honouring such designationsAlthough the deceased had signed a beneficiary designation form naming Gary as the direct recipient of the proceeds, the RRIF was nevertheless deemed as part of the estate. Very murky indeed: RRIF = beneficiary designation form would previously have been honoured but instead RRIF funds were added to estate.

In doing so, the Court created doubt as to whether routine designations, whether they be in registered plans or insurance, will now be subject to increased legal scrutiny and litigation. Will this now apply to insurance policies as well as registered plans and bank assets? Will an adult beneficiary (other than a spouse) now have to scramble to find additional proof? If the supporting evidence is not enough, will they be trapped in endless litigation? How much will the litigation process cost compared to the insurance proceeds?

Today, there’s concern that beneficiary designations in favour of adult children in life insurance policies can now be challenged. This particular case is not being appealed and represents the current law in Ontario. Moreover, this “resulting trust” principle is also being applied in other provinces across Canada (excluding Quebec, which is a civil-law province). So how can you protect your assets and ensure that they go directly to your designated beneficiary?

Work with your advisor and lawyer jointly on estate plans and make your intentions crystal clear and have ample documentation to support them. Communication and meticulous planning are key.

Keep the following in mind as you consider who could benefit from your investments or insurance if something happens to you:

  1. Failing to name a beneficiary – If you don’t name a beneficiary on your life insurance policy or investments, your assets could go through probate when you pass away and face otherwise avoidable tax consequences.
  2. Naming minor children – If you direct the proceeds of your life insurance directly to your minor children rather than a trust for them, a judge will decide who manages the money.
  3. Naming a child with special needs (or a dependent adult) – When you name a child with special needs, rather than a trust for his or her benefit (if they qualify for a trust), you may unintentionally disqualify them from receiving much-needed government benefits.
  4. Ignoring spousal rights – Although you don’t have to designate your spouse as a beneficiary of your registered retirement plans, you can’t name someone else unless they sign a waiver if you live in a community property province, such as Quebec, Ontario or Alberta. Otherwise, you may put your beneficiary’s inheritance at risk.
  5. Ignoring tax consequences – Because estate tax varies from province to province, be sure to talk with your tax advisor to avoid unnecessary tax implications before you name a beneficiary.
  6. Divorce/Seperation/Life Change – Whenever you have a major life change, check out your beneficiary designations. Forgetting to update the beneficiary form may mean the wrong person gets your assets (example: an ex-spouse). A formal split with a spouse doesn’t automatically revoke a prior beneficiary designation. Each province handles this differently, but in most cases a new beneficiary designation must be made before a previous one is revoked.
  7. Naming only one beneficiary – If this beneficiary dies before you, a judge may have to decide how your assets (like a Registered Retirement Savings Plan or Registered Retirement Income Fund) get distributed.  Naming a contingent beneficiary, or if you intend to split the benefit,  two or more beneficiaries, which can reduce this risk.
  8. Using non-specific beneficiary designations – Listing “my children” as your beneficiaries can lead to many problems after you’re gone, particularly if you have a blended family (many provinces do not recognize step-children as “children”) or if one of your children predeceases you (that child’s share may go to your other children, not that child’s children).
  9. Unequal taxes – In most jurisdictions, debts and taxes owed by the deceased’s estate must be paid before assets can be distributed; these costs are usually paid from the estate itself. This can result in a grossly unfair allocation of an estate’s tax burden. If, for example, you designate your son as the sole beneficiary of your RRSP, while leaving the rest of your estate to your daughter, your daughter could actually end up paying tax on your son’s inheritance.
  10. Conflicting directions in a will – When a beneficiary differs between the will and the insurance policy designation, timing, wording and the intent of the owner of the contract is critical. 

About the author

  • Pam is the founder and “boss lady” of Savanti Insurance Agency and Savanti Investment Team (attached to PEAK Securities Inc.). She has over 15 years where she specializes in planning, investments, risk management, and tax-effective strategies for clients’ personal and/or corporate financial needs.

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Although this article was written with the utmost care and based on sources deemed reliable, there is no guarantee of its accuracy or applicability to all specific cases. This article is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. All content and information are of a general nature and does not address the circumstances of any particular individual or entity. Many of the issues discussed will vary by province. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. The opinions expressed in this article do not necessarily reflect those of Peak Securities inc.