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Many of you know that clients can designate beneficiaries of their retirement plans and insurance policies by using the standard forms provided by financial institutions. But, you may not know that valid beneficiary designations can also be made using a client’s will, as provided for under provincial legislation.

Designations by will are beneficial because they may provide more flexibility than the standard forms. Financial institution forms can have shortcomings, as there’s often an inability to include:

  • multiple beneficiaries;
  • contingent beneficiaries;
  • trustees of a trust as beneficiaries;
  • trust provisions;
  • a person to hold a minor’s entitlement in trust; and/or
  • the terms and conditions for the entitlement of the beneficiaries (as opposed to specifying simple percentages).

In most cases, clients do not question whether they’re restricted to simply filling in the “blanks” on standard forms. As a result, if a client wants to designate more than one child as a beneficiary, for example, and the form does not allow for multiple beneficiaries, he’ll often put “estate” as the beneficiary. This can lead to the value of the plan or policy being subject to probate tax and creditor claims.

A deeper look

When attempts are made to modify a standard form in order to comply with the client’s wishes and objectives, there’s often resistance by financial institutions. This happened in Kilitzoglou v. Cure, where the deceased had filed a beneficiary designation form that was rejected by the issuer because the deceased did not set out the percentage entitlement of each beneficiary. Instead, the deceased’s designation was to “[the financial institution] as there (sic) interest may appear and to [my daughter].” The financial institution’s interest related to an outstanding loan owing by the deceased.

When Kilitzoglou died, there was confusion as to whether the designation was valid. After much delay and cost, the court held the designation was valid as it complied with the provisions under Ontario’s Insurance Act: specifically, the requirement that the designation must be in writing. Still, the family could have avoided much hassle if the deceased had included a properly drafted beneficiary designation in his will, if the insurance company had not rejected a valid beneficiary designation or it provided more flexibility on its standard form.

Proper will designation clauses

A properly drafted will designation clause can overcome the above shortcomings and can provide a flexible solution to help achieve your client’s estate planning objectives. For instance, a will designation clause could provide that the proceeds of a life insurance policy are to be held in a family trust, including one created under the terms of the will. Such an arrangement may be beneficial for income-splitting, creditor and matrimonial protection, probate fee minimization, and other estate planning purposes.

The clause could ensure that any proceeds payable to a child or grandchild are held in trust until she reaches financial maturity.

If there are minor children or grandchildren and the client does not provide trust provisions, the proceeds would have to be paid into court unless someone applies to be appointed the minor’s guardian for property, thereby authorizing him to receive and manage the proceeds, which is a time-consuming and expensive process.

While some forms allow contingent beneficiaries to be designated, the form options are often over-simplified. The forms typically only allow a single contingent beneficiary in the place of a primary beneficiary. This doesn’t help if the client wants to designate, for example, all of the children of his primary beneficiary as the contingent beneficiaries. A will designation clause could be used to carry out his wishes in these circumstances.

If the client wants to leave a legacy for a certain person, but doesn’t have sufficient funds in his estate outside of plans and policies, a will designation clause could be used. Most forms do not allow a beneficiary to be designated for a specific amount or for such a contingency. Instead, they require the client to specify each beneficiary’s percentage entitlement.

A beneficiary designation in a will can also mirror any distribution scheme in a will to ensure consistency. It makes common sense in most situations to do so, particularly given the large sums which often pass under a beneficiary designation and the time, effort and expense involved in preparing an estate plan. The benefits of beneficiary designations are not lost when a will designation clause is used. In Ontario, the proceeds of the policy or plan should still pass outside of the estate and shouldn’t be subject to probate tax or claims by the deceased’s creditors, as long as the will designation clause is properly drafted. In other words, the will is simply the document used to make the designation; the designation itself does not form part of the will.

It’s important to note that certain plans don’t allow beneficiary designations by will, and they should be reviewed before a will designation is made. While all Canadian provinces and territories have legislation permitting will designations for retirement or similar plans and life insurance proceeds, it is important to check which law governs, and the specific statute governing the plan for any limitations, and to ensure the plan meets the definition. For example, Saskatchewan and Quebec laws contain restrictions relating to will designations involving certain plans. Certain prior designations may also be irrevocable.

Many clients can benefit from the flexibility of will designations and should consider using them in most circumstances.

Margaret O’Sullivan is a Toronto lawyer and principal of O’Sullivan Estate Lawyers, a boutique trusts and estates firm.

Originally published in Advisor's Edge Report

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