Should I Designate a Beneficiary and Possibly an Alternate Beneficiary on My Investment Accounts and Insurance Policies?

Some investment accounts (such as the RRSP, RRIF, TFSA, LIRA or LRSP, Annuity) allow you to designate a beneficiary on the account. Insurance policies also allow for the naming of a beneficiary. If you name a beneficiary on such an investment account or on an insurance policy, upon your death, the money from these accounts passes to your designated beneficiary outside of your Will.

Conversely, funds from an investment account or insurance policy will pass through your Will as part of your estate in the following situations:

• If no beneficiary has been named on the account;
• If a named beneficiary has predeceased you and you have not named an alternate beneficiary on the account; or
• If you have named your estate (rather than an individual) as the beneficiary on the account.

However, if you have named a person as a beneficiary on an investment account or insurance policy, the financial institute or the insurer need not wait until the estate is probated before paying the funds to the beneficiary. In situations in which it is important that a beneficiary have access to resources shortly after your death, you can make provisions for that beneficiary by naming him or her as a beneficiary on an investment account or insurance policy.

In deciding whether to name a beneficiary on an investment account it is important to consider the following points.

1) Any taxes arising out of the payment of an investment account to the beneficiary named on that account are payable from the general estate, rather than deducted from the account.

2) Section 25 of the Wills and Succession Act, c.W-12.2 designates that if a testator has named a spouse or an adult interdependent partner as a beneficiary under the Will, the gift to that person is revoked by virtue of the Act upon divorce of that spouse (if after February 1, 2012), or separation from that adult interdependent partner (if after February 1, 2012), unless the Will shows a contrary intention. However, the same legislation does not govern a named spouse or adult interdependent beneficiary on an investment account or insurance policy. Therefore, if there is subsequent divorce from the spouse or separation from the adult interdependent partner, the account holder or policyholder would need to change their designated beneficiary if they do not want their ex to benefit from the funds.

3) Many individuals forget who they have named on their insurance policy or investment accounts as beneficiaries, and when they make the inquiry, they find out it is not who they would name currently.

4) There is usually not the ability on insurance policies or (non-trust) investment accounts to set up trust situations for the named beneficiary. When individuals want to benefit a minor child or a dependent adult, often they want to set up trust funds with a Trustee controlling the investment and distribution from those funds. The Will may be a better vehicle for setting up of a trust fund for a beneficiary.

5) If a testator wants to benefit a number of individuals in an even-handed way, it may be difficult to determine what is fair if one beneficiary is taking by way of being a named beneficiary on an insurance policy or investment account and the other is taking as a result of being named as a beneficiary in a Will. There may be differences of value in these gifts and of tax consequences.

6) If the benefit of an investment account or life insurance policy passes to the beneficiary designated on the account, the money will not be subject to any claims against the estate, including any income tax claims.

Many individuals decide to name a loved one on an insurance policy or investment account in order to provide that individual with access to funds as soon as possible after the policyholder dies. However, there are several options for an individual in setting up an effective estate plan upon death. At Quantz Law, we review your various options with you to advise you on how to best benefit your loved ones through your investments, insurance policies and your Will.

NOTICE TO READER: The summaries of legal rights and remedies described above are general references to the Alberta laws existing at the date of the publication and may not apply to the reader’s individual circumstances. Also, the laws may change. These legal summaries are not to be relied upon as applicable to your individual circumstances and are subject to a complete review of the facts and applicable laws in every case.