The purpose of this column is NOT to advise people on their legal affairs or concerns, but to provide basic information for discussion with their own legal counsel.
Written by Ruth Magnusson, Lawyer, Straith and Company
A topic related to Will and estate planning is beneficiary designations. By this I mean the choice of a beneficiary under a life insurance policy, registered retirement savings plan (RRSP), or registered income fund (RIF). Beneficiary designations can also be relevant with respect to pension rights, superannuation rights, or other benefits payable on the death of a person. Your beneficiary is the person who will receive the money under the insurance policy, RRSP, or whatever the case may be. You can name one, two or more beneficiaries. Here are some points to consider:
Avoiding Probate Fees
In previous articles I have talked about probate fees. These are fees that are payable on the “probatable estate” of a deceased person. If you designate a beneficiary other than your estate under an insurance plan, RRSP, etc., then the proceeds from that policy or plan will pass directly to that beneficiary without passing under the Will. This way you can avoid paying the probate fees. However you do need to be careful about beneficiary designations made solely to avoid probate fees. Sometimes it is better just to pay the fees.
Designating your Children
An example of a case where it may have been better to have the money go under the Will is the case of a widow with three children named as the beneficiaries of her RIF. On the death of the widow her children then alive would receive equal shares of the RIF. This means if one child died before her, the remaining 2 alone would inherit. However if it was the widow’s intention to make sure that her grandchildren benefit in the event of the death of a parent then, unfortunately, her intentions would have been defeated by naming her children as beneficiaries under the RIF. Her children alive at her death would take 1/2 each. Under the Will however each of these 2 children would have received 1/3 each, and the deceased child’s 1/3 share would have gone to the deceased’s children.
When Beneficiaries are Minors
Another consideration is naming beneficiaries who are under the age of 19. In such a case you need to consider selecting a trustee to receive and administer the funds for the minor child. Even if a beneficiary is over 19 you may feel uncomfortable having a large amount of money falling directly into that person’s hands. You may wish to consider a trust under your Will or some other way to leave money to such a beneficiary.
When a Beneficiary is Mentally Incompetent
In some cases it may be a mistake to name as a beneficiary a person who is mentally incompetent. For example if there is no person named under a power of attorney who could handle the funds for the incapacitated person, it may be preferable to have the proceeds pass under the Will and to set up a trust in order to care for the incompetent person.
Impact of the Disability Benefits Act
If a designated beneficiary is receiving disability benefits under the Disability Benefits Program Act then upon direct receipt of an inheritance under a Will the benefits payable to that person may be cut off. This is another situation where it may be preferable to have the proceeds payable under the Will, so that a discretionary trust may be set up for the benefit of the disabled person. (Please note that even if a person receiving disability benefits has received a lump sum as an inheritance under a Will, or pursuant to a beneficiary designation, it still may be possible to arrange that person’s affairs so that they can continue to receive disability benefits.)
Income Tax Considerations
If your designated beneficiary of an RRSP or RIF is a spouse then the monies held in your RRSP or RIF can pass tax free to the spouse. It is important to know, however, if the beneficiary is a child or any other person then upon your death the plan will be collapsed and a potentially large amount of income tax may be payable. (There is an exception for certain disabled persons.)
Also, in the context of your Will planning, you may need to consider who should pay the tax upon the collapse of an RRSP. Many people assume that it would be the beneficiary of the registered plan who would pay the tax, however this may not be the case. You can see that beneficiary designation can raise many important questions. Every person’s situation is unique, and the issue of beneficiary designation is only one matter that should be reviewed in the context of overall Will and estate planning.
By Ruth Magnusson, Legal Considerations in Caregiving in “Network News”, Vol. 15, No. 2, July 2001