Beneficiary designations are a very important piece of any estate plan. These designations can be made on registered plans, such as a RRSP, RRIF, or TFSA, as well as on life insurance policies and segregated funds (referred to each as a “Plan” in this blog). You can designate a beneficiary on your Plans by:
- filling out the necessary paperwork with the company you hold the Plan with,
- including the designations in your Will, or
- for life insurance policies, designating the beneficiaries in a life insurance trust outside of your Will.
Naming a beneficiary on your Plans means that, upon your death, the Plan funds will bypass your estate. The benefits of this are twofold:
- the funds will not subject to probate, meaning that they can be paid directly from the company that holds the Plan to the named beneficiary (unlike estate assets which your executor cannot pay to a beneficiary until probate has been granted, among other steps in the estate administration process);
- by not forming part of your estate the Plan funds are not subject to probate tax, which is generally 1.5% in Ontario.
If you do not appoint a beneficiary, or none of the beneficiaries you’ve named survive you, by default the funds in the Plan will form part of your estate. If payable to your estate, such funds will be subject to the probate process, and accordingly probate tax. Furthermore, funds paid into your estate will not enjoy the same creditor protection they would if paid to a designated beneficiary.
In some circumstances it may make sense to make a beneficiary designation on the forms provided by the company you hold the Plan with. However, there are drawbacks to this option. One major limitation is that if you were to name minor children as beneficiaries of a Plan, they would be entitled to receive these funds upon reaching age 18. This is usually much younger than most clients want their children coming into a large sum of money. Another drawback is that company forms don’t allow for involved gift over provisions, which is problematic if there is an “out of order death.” For example, if you and your spouse name yourselves as primary beneficiaries on each other’s Plans and your two adult children as the contingent beneficiaries on such Plans, if one of your children predeceased the survivor of you and your spouse and the surviving spouse could not update the beneficiary designation before his or her death, your surviving child would receive all of the Plan funds. This doesn’t align with many clients’ intentions, as they would often prefer that the share of any predeceased child pass to that child’s children (i.e., the clients’ grandchildren) rather than all of the Plan funds go to the surviving child.
If you designate the beneficiaries of your Plans in your Will, you can provide for trusts for minors and more complex gift over provisions can be drafted to account for an out of order death. A life insurance trust has the same benefits, and can be included in the Will or in a separate document. The same benefits mentioned above are also achieved, whereby the Plans will bypass probate and thus, probate tax.
It should be noted that if you have a spouse or common-law partner, you should consider naming him or her as successor annuitant on your RRIF and/or successor holder on your TFSA. This designation can also be completed with the company you hold your Plans with or in your Will. A successor is distinguishable from a beneficiary. My blog on this can be found here: https://www.millsandmills.ca/blog/successor-vs-named-beneficiary/.
You should be sure that you know who the beneficiaries on your Plans are and that the designations are completed in a way that best suits your intentions and accounts for the above considerations. It is important to speak with your estate planning lawyer to discuss your beneficiary designations as part of your estate plan on the whole. To learn more about how we may be able to assist you in this regard, please reach out to us online or by phone at (416) 682-7058.