This week on Hull on Estate and Succession Planning, Ian and Suzana discuss core issues in estate planning; specifically the importance of beneficiary designations.

Beneficiary Designations - Hull on Estate and Succession Planning Podcast #82

Posted on October 16^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag:  Hi, and welcome to Hull on Estate and Succession Planning.  You’re listening to Episode #82 of our podcast on Tuesday, October 16^th, 2007.

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by

Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada.  Here are Ian and Suzana.

Suzana Popovic-Montag:  Hi there Ian, how are you today?

Ian Hull:  I’m great Suzana.  How are you doing?

Suzana Popovic-Montag:  I’m fine thank you.

Ian Hull:  We have had a busy short last while.  We’ve been obviously busy with our practices but been out speaking and having some fun dealing with some of these interesting estate issues.  I know you hosted our Hull on Estates Breakfast which was, I think it was October 4^th now.  So we’ve come and gone with that.  And you were also heavily involved in a Law Society of Upper Canada program in the past week which was a great success where we spoke with a group of lawyers on capacity issues relating to personal injury claims.

Suzana Popovic-Montag:  It’s certainly been a good fall beginning to the fall season with all of the excellent CLE that’s out there, Ian, so it’s been a wonderful opportunity.

Ian Hull:  And we’re looking forward to…I know I’m looking forward to next week to a busy continued programs that we’re both going to be involved with.  So why don’t we turn today on Hull on Estate and Succession Planning to the topic that we’ve been sort of working through.  As we have in the past, we’ve sort of broken down what we call the tax planned Will issues and some of these issues Lindsay Histrop brought to the fore, so to speak, at a seminar that she presented on September 17^th, 2007 and we really enjoyed both what she had to say and some of the paper that she…and certainly her paper that she presented.  And it sort of was a trigger for you and I to sit back and re-focus our discussions on Hull on Estate and Succession Planning on some of the core issues relating to estate planning.  We have generally tried to get people to think outside the box and talk about, you know, talk to your family, talk about some real communication aspects of estate planning.  But we’re sort of circling back to make sure that we don’t miss any of the core tax planning issues that are very important to an estate plan.

Suzana Popovic-Montag:  And traditionally also, the core of much of the planning that’s been done.  So notwithstanding our hope that, you know, we can bring about conversation and openness and things like that in the estate planning process, the truth is that there are certain things that will always be the core to when people decide to plan and administer their estates.

Ian Hull:  And as we’ve talked about, there’s sort of….we’ve broken down this series, we’ll call this our mini-series on tax planning and issues relating to estate planning.  And we’re talking about obviously the core issue of avoiding in Ontario certainly what we call the estate tax itself, talking about deferral and capital gains and those sort of core issues in terms of tax avoidance.  And then finally dealing with later in the series, we’re going to deal with some of the US issues which can be very important.  And can be important with a lot of estates because even in situations where an estate may at first look fairly simple, you throw in a condominium down in Florida into the mix of an estate plan, and you create your own new estate planning issues.

But let’s re-circle back here and talk a little bit about what we…why don’t we spend a minute just talking about what we had covered last week and then move into our new area of beneficiary designations.

Suzana Popovic-Montag:  Well Ian, last week we were talking about the fact that people can have more than one Will and we called them the primary and the secondary Wills.  The idea being that one Will, the primary Will, would be the one that you would actually probate, whereas the secondary Will would be one that you wouldn’t have to.  And we talked about, you know, the reasons we would want to do that and the kinds of assets that we would put into those particular Wills.

Ian Hull:  So moving on from that core estate planning technique, another fundamental estate planning technique is really important, is of course the organizing and dealing with essentially beneficiary designations.  Many of us have different types of investments that can be beneficiary designated.  Some flow outside of the estate, some flow through the estate, but nonetheless, there are instruments such as life insurance policies and the like that can be designated specifically to an individual for a lot of good reasons.

Suzana Popovic-Montag: And the key to that designation is if you designate someone other than your estate to be the beneficiary of, for instance, your life insurance proceeds or your RRSPs, then that designated beneficiary would receive the benefit of that policy without it passing through the estate and without it therefore attracting probate fees.

Ian Hull:  And the other aspect of designations of beneficiaries and where it can be a very useful tool is, is that it is a fundamental creditor protection technique that works in not all, but in most cases.  For an example, an insurance policy is typically creditor-proof, when it’s in a situation where it flows outside of the estate.  And some situations certainly, recently some of the case law is pointing to RRSPs as being able to be essentially creditor-proof as well.  So there’s another aspect of your, you know, estate administration, and good reason for making sure we have organized our designations of beneficiaries properly.

Suzana Popovic-Montag:  Ian, while we’re talking about this topic, one thing that sort of comes to mind is what happens if you’ve designated a beneficiary whose actually a minor at the time of your death?

Ian Hull:  Well, that can be I guess problematic if you haven’t thought it through.  There are, and in our web page we have some great articles on this specifically.  Anne Werker has written an article for the Probater on insurance trusts.  There are ways to designate.  For example, an insurance policy, essentially the proceeds being designated into a trust.  And as I say, Anne Werker has flushed out the mechanics behind that.  But there are ways to protect and help protect minor beneficiaries, allowing it to come outside of the estate.  And then there are, of course, ways to designate beneficiaries within the estate by simply putting, for example, the insurance proceeds into a testamentary trust that has been established under the terms of the Will.

Suzana Popovic-Montag:  And I guess the benefit with that kind of arrangement is then that you can appoint a trustee for those funds, who could hold the funds for the benefit of the minor until he or she attains the age of majority.  Because otherwise, as far as I understand it, if you were to designate a minor as a beneficiary, then that money would, without, you know, some trust arrangement otherwise being established, that money would be payable into the Court and held by the Court until the child turns the age of 18, is that right?

Ian Hull:  Well, that’s right.  And the other way, of course, we could control that money is if we go under the Children’s Law Reform Act and get appointed guardian of the minor child’s property before they turn 18, so proceeds from an insurance policy that aren’t properly designated, are either going to end up in Court or they could end up in the hands of the parent after what can be a relatively expensive process of applying to the Court to essentially gain control of those monies for your minor child.

Suzana Popovic-Montag:  So the point then really being that even though you think you’re doing all this fancy planning by designating a beneficiary other than your estate to receive these proceeds from life insurance, RRSPs or the like, you also want to keep in mind that there’s a practical consideration there in terms of the age of that beneficiary as well.

Ian Hull:  For sure.  Let’s turn now to designations generally.  Now, we’ll use the Ontario example because under the Succession Law Reform Act, there are fairly basic rules that have been established as to how and what we can do in designations of beneficiaries.

Suzana Popovic-Montag:  And as I said before, you can use your Will to actually create a trust so that you can appoint, you know, trustees, designate who the beneficiaries of the trust funds will be, and empower the trustee with rights and obligations and duties that wouldn’t otherwise be the situation if the money were simply paid into Court.

Ian Hull:  And under the Act, for those who are interested in seeking this, you know, so the background is is that we need to look to Section 51…I’m just trying to read my Act here…51 of the Succession Law Reform Act, and that points us to some of the rules surrounding and the statutory authority for making these kinds of trust designations and creating these kinds of designations for beneficiaries under a Will.

Suzana Popovic-Montag:  And just as a practice point I think in terms of where you actually put this provision in a trust when someone’s actually drafting it, you typically will see it set up at the very beginning of a trust before the other provisions in the Will so that it’s separate from the other estate assets and therefore free from possible claim for probate fees on that trust as well.

Ian Hull:  So, and then to just step back on our sort of last rounding up of this issue, designation of beneficiaries, we also, you know, we’ve got the more complex situation where you have minor children.  Or if you have a disabled child, where you want to create these trust arrangements.  But the basic scenario and one that is used effectively in estate planning is to simply pass an insurance, for example, an insurance policy, directly to the surviving spouse.  And that’s the one we see most often where a husband and wife situation where the husband or the wife owns an insurance policy and then they simply say, fill out the form when they apply for the insurance policy and they put down beneficiary designation being the wife.  It creates some great planning abilities, it avoids the estate tax in Ontario, it gives you creditor protection so that those monies can pass to the surviving spouse notwithstanding your own estate situation and it is so important.  And I tell my clients it’s so important that we want to sit down and re-visit those designations of beneficiaries, whether it is a complex scenario.  That’s one that would trigger a re-visiting most naturally, but even in simple situations, you want to make sure, I tell my clients you want to make sure that you’ve not got situations where, for example, the insurance policy for $100,000 is being designated to the estate.  You will create a tax problem for the estates administration tax, you will lose your creditor protection quite possibly if it’s going directly to the spouse, and it may not make sense in most situations.  It may make sense in other situations but it’s a personal choice that you want to look at your global estate plan before you’ve made your final decision on the designation of beneficiaries, which people don’t…most people don’t do when they’re filing their insurance policy application.

Suzana Popovic-Montag:  That’s a great point Ian, and in addition, I think you want to re-visit it too as your circumstances change, because it may turn out that you’ve designated a former spouse, for instance, as a beneficiary of some proceeds.  And then when you pass away, that might not have been necessarily what you would have otherwise intended.  So as your circumstances change, you want to make sure that those designations are still what you intend them to be.

Ian Hull:  No, that’s a great point.  We’ve seen cases like that and it’s frustrating for the family sometimes when they get in a situation where they’ve gone and the marriage breakdown, they’ve changed their Wills as they are told to do but they forget to deal with the insurance designations and the policy ends up somewhere where maybe it shouldn’t.

Suzana Popovic-Montag:  And quickly so too, because our experience seems to be that those policies are paid out quite quickly to the named beneficiaries.  So in that case then, if it’s paid out to someone you wouldn’t have wanted it to be paid out to, then you’re faced with a situation where you’re trying to chase the money back, and good luck to you in those situations.

Ian Hull:  Absolutely.

Suzana Popovic-Montag:  Okay.  Well thanks very much, Ian.  I think that brings us to an end of this podcast.

Ian Hull:  Thanks Suzana.

You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag.  The podcast you have been listening to has been provided as an information service.  It is a summary of current legal issues in estates and estate planning.  It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.

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Certainly, non-legal professionals such as financial advisors will frequently highlight the benefits to their clients of structuring their affairs in such a way as to minimize estate administration tax. Lawyers, as well, will recommend such benefits, mindful of the pitfalls associated when a beneficiary does not act as intended. For instance, where an individual designates a beneficiary of an asset, not for that person's personal benefit but rather, to distribute in accordance with a Will or some other written or verbal instructions (ie. a secret trust), the issue of trust becomes paramount.

What if the beneficiary does not distribute the asset as the deceased intended but keeps it for herself? For the litigation lawyer, it may be a serious challenge to prove a breach of trust on behalf of disappointed beneficiaries. The designated beneficiary can simply take the position that she has received all right, title and interest in the asset. If the designated beneficiary is herself named executor of the deceased's estate, there may well be some legitimate questions as to whether she was expected to distribute the asset in accordance with the Will. The designation, if contained in the Will, may ideally clarify whether the asset is to be subject to the terms of the Will.

Have a great weekend and we'll be back on Tuesday, David. --------

s. 52(1) A revocation in a will is effective to revoke a designation made by instrument only if the revocation relates expressly to the designation, either generally or specifically.

The revocation of a RRSP, for example, must reference the RRSP in sufficient detail, to leave no doubt as to which instrument is being revoked. However, the Courts have had to consider how to interpret this subsection. We will consider this issue further in tomorrow's blog.

(2) Despite section 15*, a later designation revokes an earlier designation to the extent of any inconsistency.

*Section 15 of the SLRA states that a will is revoked only by: marriage, a later will, a written declaration made with the formality of a will, or destruction by the testator or another person under his or her presence and direction.

(3) Revocation of a will revokes a designation in the will.

(4) A designation or revocation contained in an instrument purporting to be a will is not invalid by reason only of the fact that the instrument is invalid as a will.

(5) A designation in an instrument that purports to be but is not a valid will is revoked by an event that would have the effect of revoking the instrument if it had been a valid will.

(6) Revocation of a designation does not revive an earlier designation.

(7) Despite section 22, a designation or revocation in a will is effective from the time when the will is signed.

Section 22 of the SLRA states that a Will speaks and takes effect as if it had been made immediately before the death of the testator. As we can see, section 52 is a fairly exhaustive list of the possible scenarios that may unfold relating to the revocation of beneficiary designations. Tomorrow's blog will consider these provisions in further detail.

Have a great day, David. --------

Indeed, an increasingly common estate planning tool is to hold as many assets as possible outside of the estate, primarily as a legitimate means of avoiding estate administration tax (more commonly known as probate fees) and, in certain cases, protection from creditors.

The most common example of such assets that come to mind are Life Insurance, Registered Retirement Saving Plans ("RRSP") or Registered Retirement Income Funds ("RRIF"). Similarly, (and an issue to be considered in future blogs), assets that are jointly held (unless impressed with a trust for the estate) will pass to the surviving joint owner by right of survivorship.

The making and revoking of beneficiary designations are not always simple matters and, regrettably, litigation may ensue where there is uncertainty. Recent caselaw has raised some interesting twists on this developing area of estate litigation.

In Ontario, the provisions of Part III of the Succession Law Reform Act relating to the making of a beneficiary designation are contained in section 51 which reads as follows (within underlining added for emphasis):

s. 51(1) A participant may designate a person to receive a benefit payable under a plan on the participant's death,

(a) by an instrument signed by him or her or signed on his or her behalf by another person in his or her presence and by his or her direction; or (b) by will, and may revoke the designation by either of these methods.

s. 51(2) A designation in a will is effective only if it relates expressly to a plan, either generally or specifically.

The SLRA excludes plans such as RRSPs issued under Part V of the Insurance Act.

An "instrument" is not defined in the Act. The Act does not require that revocation by instrument follow any particular form or formality (Burgess v. Burgess Estate (2000) 52 O.R. (3d) 61.) Accordingly, it is not necessary for a beneficiary designation to be witnessed by two persons as is the case with a Will.

We will consider the revocation of beneficiary designations in tommorrow's blog.

Have a great day, David. --------