An estate plan includes your will, but it also contains more documents, which are collectively designed to make life easier for your loved ones after you’ve passed away. These can include a power of attorney, a list of your assets, instructions for your personal and medical care in the event of your incapacity, guardianship details for minor children (which should be included in your will) and life insurance. They should also include the names of the beneficiaries for your life insurance policies and registered accounts (a beneficiary is the person you leave your property, belongings or assets to).
Naming beneficiaries can be an important part of your estate plan: it can help ensure that the right people receive the right assets in a timely fashion. It can also allow you to pass on some assets without them being part of your will or passing through your estate. This in turn can be advantageous from both an estate planning and tax planning point of view. It’s important to note, however, that naming beneficiaries is not always the best decision. In this article, we’ll look at why it can be useful to name beneficiaries and how you can do it effectively.
What is a beneficiary designation?
Across Canada, you can designate (name) beneficiaries to receive the proceeds from life insurance policies. Outside Quebec, you can also designate beneficiaries to receive the proceeds from many registered accounts, such as RRSPs, RRIFs, TFSAs, deferred profit sharing plans and pension plans. The beneficiary you designate is the person the proceeds of the policy or account will go to when you die. If you don’t designate beneficiaries, then the proceeds will go to your estate and distributed by your will, if you have one. If you don’t have a will, you’re considered to have died intestate, and local intestate succession rules will determine who gets your property and assets.
Outside Quebec, many financial institutions won’t release estate assets to your executor or liquidator (this is the personal representative of your estate) without proof of a probated will.* Probate is a process where the courts certify the validity of your will. The courts will generally charge a fee before they issue probate, and in some provinces and territories, the amount of this fee increases based on the value of your estate, so it can become costly. Going through probate also takes time; by using beneficiary designations, you can avoid the cost and time involved with probate.
Why should you designate beneficiaries?
Designating beneficiaries means that the value of the policy or account will not be subject to probate fees and may also be protected from some of your estate’s creditors. It can also maintain your family’s privacy; assets that are passed on to beneficiaries remain outside your estate and therefore private, whereas when your will is probated, certain details about your estate assets become part of the public record.
When should you not use beneficiary designations?
Beneficiary designations work best if you only have one beneficiary, who is also the sole beneficiary of your estate under your will and a financially responsible adult. Designating multiple beneficiaries can create significant difficulties if one of them dies before you, and you should also avoid designating minors and mentally incapable or financially irresponsible people.
Other strategies for avoiding probate
Since the probate process could lead to probate fees being owed by your estate, it’s useful to find ways to minimize them. As mentioned above, naming a beneficiary for registered accounts, life insurance policies and other insurance products (for example, segregated funds and annuities) can ensure that the death benefits will pass outside your estate and therefore avoid being subject to probate fees. Other proven strategies to help bypass probate include:
- Inter vivos gifting. Depending on your circumstances, it might make sense to distribute some property while you’re still alive. Not only will it keep these assets out of the probate process, but family members can benefit immediately from your financial support. Many people enjoy seeing how they’re making a difference in the lives of their loved ones. Check with your IG Advisor to see what may qualify as an inter vivos gift, to avoid unforeseen (and unwanted) tax consequences.
- Alter ego and joint partner trusts. Another strategy is to transfer assets into an alter ego trust or joint partner trust, on a tax-deferred rollover basis. If the trust benefits the contributor (known as the “settlor”) during their lifetime, it’s called an alter ego trust. If the trust benefits the settlor and their spouse/common-law partner during both their lifetimes, then it’s a joint partner trust. In either case, the settlor and trustee(s) must reside in Canada and the settlor must be at least 65. Only the settlor (or settlor and spouse) may receive and use income generated in the trust while they’re alive. Upon their death, the trust’s proceeds pass to the people identified in the trust document, outside the estate, thereby avoiding probate.
- Joint tenancy with right of survivorship. You can hold non-registered capital property in joint tenancy with one or more other joint tenants. When one joint tenant dies, the jointly owned property (for example, a family home, another form of real estate or an investment account) transfers to the surviving joint tenant(s) and doesn’t constitute part of the deceased’s estate. As a result, the probate process won’t immediately apply, and the deceased’s creditors may not have a claim against this property. Owning an asset in joint tenancy with your spouse or common-law partner may make sense if you want them to inherit 100% of your estate (including the asset in question), but jointly owning assets with someone who is not your spouse (such as a child, grandchild, other family member or friend) should be approached with caution and may not even avoid probate.
Benefit from professional guidance
Each province/territory has its own estate planning rules as regards probate and designating beneficiaries. Your IG Advisor can help you understand the specific considerations and legal/tax aspects of estate planning that apply to you.
For many people, estate planning can be difficult and emotionally draining. Confronting one’s mortality isn’t easy, but working with a team of financial and legal professionals to create a comprehensive, tax-efficient estate plan can help ensure your loved ones are cared for after you’re gone.
Contact your IG Advisor to discuss estate planning and to help ensure that the way you name your beneficiaries is appropriate for your unique circumstances and that it helps to optimize your estate plan. If you don’t have an IG Advisor, you can find one here.
* In Quebec, most wills are notarial wills and probate is not required.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.
Insurance products and services distributed through I.G. Insurance Services Inc. (in Québec, a Financial Services Firm). Insurance license sponsored by The Canada Life Assurance Company (outside of Québec).
