Beneficiary Designations and Your Estate


There are certain financial assets – ie. registered plans such as RRSPs, RRIFs etc., and life insurance – which allow for one or more beneficiaries to be appointed to receive the funds after the death of the plan- or policy-holder.

Beneficiary designations can be a tax-efficient way to transfer these assets on your death since they will pass directly to the named beneficiary outside of your estate. This means that they will not be subject to Estate Administration Tax (formerly known as “probate fees”). In the case of RRSPs and RRIFs, significant income tax savings can also be achieved if certain classes of beneficiaries (most notably, a spouse), is designated as the beneficiary. Certain beneficiaries are able to “rollover” amounts received from a RRSP/RRIF into their own registered plans and therefore avoid the inclusion of these assets in the deceased’s income in the year of death.

There are some important issues you should consider when making beneficiary designations and planning your estate:
1) Have you designated the same people as beneficiaries on your registered plans/life insurance as are the beneficiaries in your will?
2) Have you designated anyone who has a legal disability as primary or contingent beneficiaries?

1 – What is the relationship between your beneficiary designations and the rest of your estate?
If you designate a beneficiary on your registered plan who is not eligible for a tax-deferred rollover, or if you have not designated a beneficiary at all, the funds in the account on the date of your death will be included in your income on your final income tax return and your estate will be liable to pay income tax on this amount at the normal marginal rates for income.

The beneficiary will receive the entire amount designated to him or her, while the estate will bear the income tax liability. If the beneficiary of your registered plan is not the same person or persons as is in your will, then the beneficiaries named in your will end up paying tax on a gift they do not receive. This often causes friction between the different beneficiaries.

If you do not have a will, the Succession Law Reform Act sets out an order of priority for determining who will receive the assets of your estate. If your beneficiary designation(s) on your registered plans are not the same people as those who stand to inherit your estate under these rules, then you will encounter the same problem.

If you have different plans for your registered funds as compared to the rest of your estate, you should consult with your estate lawyer regarding how to best achieve these goals.

2 – Have you designated anyone who has a legal disability as a primary or contingent beneficiary?
Clients often come to us with concerns regarding providing for dependants of theirs who may be minors or who may have other disabilities that prevent them from being able to manage their inheritance themselves.

Most parents of minor children or children with disabilities who we meet feel the need to have their child’s inheritance held in trust for them. Often parents wish for that trust to extend beyond age 18 (legal adulthood) and to provide their children with their inheritance gradually, rather than as a big lump sum. It is common for this kind of a trust to be provided for in the parents’ wills, but if the children are designated directly as beneficiaries on life insurance or registered plans, those assets will not form part of the trust set up in the parents’ wills, so, depending on the situation, the funds may be given directly to the child, paid into court, or potentially they will be required to purchase an annuity whose final payment occurs before the child’s 19th birthday. Sometimes, parents designate their children as beneficiaries and note on the designation form that their share is held “in trust.” This bare trust arrangement will likely not provide the trustee with any of the powers that he or she would have via the trust prepared for the parents’ will and may mean that the trustee would have to apply to the court in order to manage the funds.

Parents of children with disabilities also may be concerned with how an inheritance may affect their child’s benefits through the Ontario Disability Support Program (ODSP). It is common for such a beneficiary’s inheritance to be placed in a special kind of trust (often called a “Henson” trust or absolute discretionary trust) in order to protect a disabled child’s ODSP benefits. A direct designation, or even a designation with a “bare trust” arrangement will not achieve this goal and, depending on the situation, may jeopardize the beneficiary’s ODSP benefits as well as pose the problems described above (ie. payment into court, etc.).

It is possible to have the funds from registered plans and life insurance held in various kinds of trusts for beneficiaries via documents that an experienced lawyer can prepare. If it is important to you that your assets be held on trust for any of your beneficiaries, you should consult with your estate lawyer as to the best way to do this.



About the Author

EMMA O’DONNELL - Burlington Lawyer


Emma is a lawyer in Burlington who is proud to serve her local community with real estate, business law and wills & estates expertise.