Some assets, including certain registered accounts and insurance policies, can have beneficiary designations. These designations can affect who receives the asset when you die and, in some cases, whether the asset forms part of your estate.
What is a beneficiary designation?
A beneficiary designation identifies who you want to receive a particular asset or benefit when you die.
Depending on the type of asset and the governing legislation or contract, a beneficiary may be named directly through the financial institution or insurance company, or in some circumstances through a will. For example, you may have named a spouse or common-law partner, a child, another family member, a charity or your estate as a beneficiary.
The important point is that your will and your beneficiary designations work together.
Why doesn’t my will automatically control everything?
It is a common misconception that everything you own passes according to your will.
For example, the BC’s Wills, Estates and Succession Act contains rules dealing with designated beneficiaries of certain benefit plans. Where the legislation applies, a designated benefit may pass directly to the designated beneficiary rather than becoming part of the estate.
Life insurance policies also have specific beneficiary designation rules under BC’s Insurance Act. An insured person can designate a beneficiary, and an insurance designation can be made or changed in accordance with the applicable rules.
This means that simply changing your will may not be enough to change who receives every asset.
What happens to an RRSP when you die?
RRSPs are a good example of why beneficiary designations matter and why estate planning should involve both legal and tax considerations. A beneficiary may be designated in the RRSP contract or, in certain circumstances, in the deceased person’s will. If there is a valid beneficiary designation, the RRSP issuer may pay the proceeds to that beneficiary. If there is no valid designation, the RRSP may instead be paid to the estate.
There can also be important tax consequences regarding RRSPs. Generally, the fair market value of an RRSP at death can be included in the deceased person’s income for the year of death. However, special rules can allow certain amounts to be transferred on a tax-deferred basis, including where a qualifying spouse or common-law partner is the beneficiary and the applicable requirements are met.
What happens to a TFSA when you die?
TFSAs have different rules. A spouse or common-law partner may be named as a successor holder. Where the requirements are met, the surviving spouse or common-law partner becomes the new holder of the TFSA upon the original holder’s death. The TFSA can continue to exist, rather than simply being paid out as part of the estate.
A TFSA can also have a designated beneficiary who is not a successor holder. If there is no successor holder or beneficiary, the TFSA is generally directed to the deceased person’s estate.
The tax treatment can also differ depending on the type of TFSA, the beneficiary and what happens to the account after death.
What about life insurance?
Life insurance policies can also have beneficiary designations. Under BC’s Insurance Act, an insured person can designate a beneficiary to receive insurance proceeds. The legislation also contains specific rules for irrevocable beneficiary designations and designations made in wills.
This can be especially important if your family circumstances (divorce or separation, new or adult children, named beneficiary has died, etc) have changed since you purchased your policy.
What happens if your beneficiary designation is outdated?
Imagine that you purchased a life insurance policy 15 years ago and named your former spouse as the beneficiary. You later separated, divorced and remarried. You updated your will to leave your estate to your new spouse and children, but never changed the beneficiary designation on the insurance policy.
Depending on the circumstances and the applicable legislation, your will may not have the effect you expected on the insurance proceeds. This is why updating your will without reviewing your beneficiary designations can leave part of your estate plan incomplete. Learn more about the signs that it may be time to update your estate plan.
Beneficiary designations after major life changes
Consider reviewing your designations after:
- Marriage or entering a common-law relationship
- Separation or divorce
- The birth or adoption of a child
- The death of a beneficiary
- A significant change in your financial circumstances
- Purchasing or selling a business
- Creating a trust
- Updating your will
- Retirement
- Receiving an inheritance
Your beneficiary designations should reflect your overall estate plan rather than being treated as a separate administrative detail.
What should you review?
When reviewing your estate plan, consider making a list of accounts and policies that may have beneficiary designations. This could include:
- RRSPs
- RRIFs
- TFSAs
- Life insurance
- Pension plans
- Other benefit plans or accounts that permit beneficiary designations
Consider who is currently named and whether those designations still make sense. You may also consider how the beneficiary designations interact with your will, trusts, family circumstances and tax planning.
Conclusion
A well-prepared estate plan considers more than the document that sits in your filing cabinet. Your will, beneficiary designations, ownership of property, insurance policies and other financial arrangements can all work together to determine what happens after your death. If you haven’t reviewed your beneficiary designations recently, it may be worth doing so alongside your will.
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Disclaimer: This blog post is for informational purposes only and should not be construed as financial or legal advice. Consult with qualified professionals to create a personalized estate plan suitable for your specific circumstances.
