Every spring day brings us closer to warm summer afternoons, perfect for lounging on the deck or at the lake with a cold beverage and our favorite reading material. Instead of that hot new best-seller, why not dust off your insurance policies and investments for your reading pleasure? They may not be on your book club's reading list, but it is critically important to ensure that you are aware of who you have, and who you should have, listed as your beneficiaries on these instruments, so that tax savings can be achieved and costly litigation can be avoided.
When you buy life insurance or set up your RRSPs, pensions and
Tax-Free Savings Accounts (TFSAs), you are asked to name a
beneficiary or, in the case of a TFSA, a successor-owner.
When the time comes for these assets to be paid out, the company or financial institution holding the assets will look at the most recent beneficiary designation, and pay out the benefits to those people who were named last. This means that you can change your beneficiaries as you need to, either on the investment or life insurance policy itself, or in your will. If you need to change the beneficiary designation on any of these items, the best practice is to do so on the instrument itself so that there is no discrepancy between the instrument and your will, and no question over which designation should apply.
If there is a beneficiary other than your estate named on the instrument, those benefits can usually be paid out directly to the beneficiary without getting tied up in the process that is required to administer the other assets in the estate. If you have named your estate as your beneficiary on your life insurance policy, then it will be paid to the executor in trust for the estate, and will be available to the estate's creditors before being paid out to the estate's beneficiaries. While there are circumstances when this is appropriate, it is usually recommended that these benefits be kept outside of the estate and be paid directly to other named beneficiaries.
Unfortunately it is not uncommon to learn that a deceased person forgot or failed to change their beneficiary designations before their death. Our Estates, Trusts and Taxation practice group has handled numerous matters where a life insurance policy had to be paid to a former spouse because the deceased did not change the beneficiary on his life insurance policy after he re-married. There are times where benefits are paid to the parents of a deceased because she signed up for those benefits at work before she got married, and neglected to revisit the designation after the wedding.
Sometimes this failure to ensure beneficiary designations are current will result in a loss of tax savings. For example, when one names their spouse as the beneficiary of their RRSPs, those investments can be rolled over to the surviving spouse's RRSPs on a tax-deferred basis and the deceased's estate will not have to pay the tax on those assets. If, however, a parent or sibling inadvertently remains noted as the beneficiary, that potential tax saving can be lost. If the deceased had wished to still benefit their parent or sibling, it would have been more advantageous to provide a gift for them in the will, rather than through an RRSP if there is a spouse that could have taken advantage of the rollover.
To complicate matters further, the laws governing how to change your beneficiaries are different depending on the type of asset that is involved. Certain pension plans will have a deemed beneficiary or "pension partner", usually a spouse or common-law spouse, which will automatically apply regardless of who is named as the beneficiary of that pension, either on the pension or in the will. Our clients must ensure that they are aware of those deemed beneficiaries so that they can provide other gifts, for example through their will, to other people that they wish to benefit rather than trying to do so through a pension that has these types of restrictions.
If changes are necessary to the beneficiaries named on a life insurance policy, care must be taken to ensure that this is done in a manner that meets the formal requirements laid out in Alberta's Insurance Act in order to be effective. We have seen many instances where parties assume that a waiver of life insurance in a divorce settlement will mean that their ex-spouse will not receive life insurance benefits. They would likely be surprised to find out that, unless they have actively changed the beneficiary in a way that complies with formalities set out in the Insurance Act, their ex-spouse will be the lucky recipient of those funds.
In addition to checking your insurance policies and investment vehicles, it is also important to understand your obligations and to ensure that you have named any parties that you are required to name as beneficiaries. This issue also arises commonly in a divorce, where it is often a term of the divorce settlement that one party will be required to name either their former spouse or the children of the relationship as a beneficiary on their life insurance or RRSPs, for at least a certain amount of time. If that party fails to ensure that he or she has properly named those beneficiaries, then their estate is open to what could be costly and uncertain litigation as to who are the rightful owners of those benefits. The situation may also arise in a corporation, where under shareholder's agreement, business partners may have an obligation to carry life insurance to benefit the company in the event of their death. Care must be taken to ensure that the beneficiaries of those policies are not changed inadvertently or there may be a liability to the company or business partner. Before changing your beneficiaries on any instruments, you must carefully consider whether you are subject to any restrictions on who may be named to receive those benefits.
If changes need to be made, they can usually be dealt with easily enough before the owner of the policy or investment passes away. Usually it is just a matter of completing a simple form and sending it back to the financial institution or insurance company. As noted above, changes can also be made through one's will.
Anyone who owns these types of assets would be well served by taking a few minutes to review their named beneficiaries. If changes need to be made, then a call to your bank, financial planner or lawyer will be required. If you have named the people you intend to benefit from your life insurance or retirement savings, then you can rest easy and start reading your book club's summer pick.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.