Do Beneficiary Designations Matter?

Absolutely, they matter a great deal.

On the surface, naming a beneficiary might seem like a box-ticking exercise—one of those administrative tasks you do because you’re supposed to. Yet, these designations are absolutely crucial.  For many  people they are of much greater consequence than their Will.   In fact, for many folks, beneficiary designations matter more than anything else with the possible exception of home ownership, and their Will is almost irrelevant.  

The Accounts With Beneficiary Designations

Beneficiary designations can directly affect who receives the funds in an RRSP, RRIF, TFSA, life insurance, and sometimes, a pension.  

Pension law in Ontario requires a pension benefit to go to a surviving spouse if any.  Beneficiary designations are only effective for pensions if there is no surviving spouse.

Designations and Income Taxes.  Beware of possible unfairness.

Some like RRSPs and RRIFs create income tax liabilities for the estate on death.  These taxes must be paid by the estate even if the funds in the account pass directly to a different designated beneficiary. This can create tremendous unfairness.  Therefore, it is important to have a well-organized plan before making beneficiary designations.

Designations and Probate

One of the most powerful features of beneficiary designations is that the funds in the account pass directly to the beneficiary without probate.  This avoids probate tax, and the funds are often released to the beneficiary much more quickly.  This can be extremely helpful.

However, it is important to not let the ‘probate tax tail wag the estate planning dog’.  Beneficiary designations should be part of a coherent estate plan, and minimizing probate taxes should be a byproduct of a good plan not the primary goal, because often that will result in very unfair and bad results.

Updating Your Designations.  Beware of another source of unfairness.

Life changes. Relationships start and end. Families expand. And yet, beneficiary designations often remain static. This can lead to outcomes you never intended—outcomes that can’t be undone once you’re gone.  These outcomes can be very unfair, especially when you consider the tax consequences for beneficiaries of the estate.

The Necessity of Keeping Designations Current.

Keeping beneficiary designations current is not optional—it’s critical. The obligation rests entirely on the account holder.

Thankfully, the process is usually as simple as a phone call or a meeting with your financial advisor.  With banks and many other financial institutions the forms are often available online.

Changing Designations Using a Will.

Sometimes it is preferable to change beneficiary designations by making a Will.  This is possible – even with a holograph Will – but the requirements are strict. 

To make an effective beneficiary designation using a Will, the Will must clearly and properly identify the account and clearly express the desire to revoke all beneficiary designations (in which case the asset will fall into the estate) or change the beneficiary designation. 

Done properly, using the Will to change a beneficiary designation can be very effective for ensuring consistency – but it must be done properly.  Ideally, the person assisting you with your estate plan should have full details of all of your accounts including account balances, account numbers, and designated beneficiaries.

The Choices

There is much more flexibility with beneficiary designations than most people realize.  You can assign an account to multiple people (or your estate) with separate percentages.  Any percentage not given to an individual will fall into your estate.

You can also assign contingency beneficiaries.  These are people who will inherit if the first named beneficiary is no longer alive.

When in doubt, remove all designations

There is nothing wrong with having all of your assets fall into your estate, where they will be dealt with according to your Will, or if there is not Will, the laws of intestate inheritance.  These are likely much fairer to your family and loved ones than stale outdated beneficiary designations.

Consider beneficiary designation management as part of your regular financial check-up. It’s about more than just keeping up with the times—it’s about ensuring your wishes are clear and will be followed to the letter.

Miltons Estates.  estates solved.