Area of Law: Wills, Estates and Powers of Attorney
Answer # 153
Beneficiary designationsRegion: Ontario Answer # 153
Under Ontario law, you may designate beneficiaries to receive certain financial assets such as life insurance proceeds, RRSPs, or pension plan benefits. These assets may be claimed by and paid directly to the designated beneficiary upon your death. The assets are not administered by the executors you name in your Will, and they are unaffected by the directions in your Will regarding the distribution of your estate. In other words, these assets are transferred outside your estate.
How to designate a beneficiary
Beneficiaries may generally be designated right on the insurance policy contract or financial plan document at the time you take out the insurance or open the plan, or at a later time. If you intend to designate one adult beneficiary, then the simplest way to do so is to complete the beneficiary designation form provided by the insurance company or financial institution and to file it with the company or institution.
Alternatively, you may make a beneficiary designation in your Will. In this case, you must identify, either generally or specifically, the life insurance policy, RRSP or other plan under which you are designating the beneficiary. Your Will only affects policies and plans that are in existence at the time that you make your Will. Therefore, if you acquire any new insurance policies or financial plans after you have signed your Will, you must prepare a new Will or a Codicil to designate beneficiaries for those policies or plans. It is a good idea to send a copy of any beneficiary designation in your Will to the insurance company or financial institution affected by it.
You may wish to designate two or more beneficiaries to receive equal or unequal shares of the proceeds of your insurance policy, RRSP or other plan, or you may wish to designate an alternate beneficiary in case the first one dies before you. If you wish to designate a child under the age of 18 as your beneficiary, then it is essential that you name another person to act as trustee of the proceeds for the child.
If there is more than one conflicting beneficiary designation in existence at your death, the one signed most recently will prevail.
Results of a beneficiary designation
Insurance proceeds flow to your designated beneficiary free of tax. Insurance proceeds paid to a designated beneficiary are also statutorily protected from any claims by your creditors. In addition, because they pass outside your estate, insurance proceeds paid to a designated beneficiary are not included in the value of your estate for the purpose of calculating probate fees. If the beneficiary designation is contained in your Will, it is important to confirm with a lawyer that it is properly worded to achieve these results.
Proceeds from other financial assets and plans, on the other hand, may be subject to tax on your death even though they are paid directly to your designated beneficiary. For example, unless you leave your RRSP or RRIF to your spouse, the entire value of the RRSP or RRIF will be included in your taxable income in the year you die, and your executors will have to satisfy the tax liability out of your estate because the assets themselves have passed outside your estate to your designated beneficiary. In addition, creditors of your estate may be able to trace proceeds of financial assets, other than insurance, into the hands of the beneficiary to whom they are paid.
If you have not designated any beneficiary at all, or if your designated beneficiary dies before you and you have not designated an alternate beneficiary, then the proceeds of the insurance policy, RRSP or other plan will normally be paid into and dealt with as part of your estate. This means that the proceeds will be subject to claims of creditors and probate fees like any other asset of your estate.
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