2. Beneficiaries

Beneficiary Designations - The Basics

 These designations are permitted by certain types of investment vehicles and insurance plans.

 A beneficiary designation allows funds to be paid directly to the intended recipient, therefore bypassing probate.

 Beneficiary designations are one of the simplest AND most impactful estate planning tools available.

 Beneficiaries for “registered accounts” should be named in the Will exactly as they are in the paperwork at the financial institution.

Beneficiary Designations

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 Certain plans allow beneficiary designations:

 Life Insurance Policies

 Segregated Funds

 RRSPs

 TFSAs

 RRIFs

 LIRA

 RPPs

 LIF

 Pension plans

 Income Tax Implications

Beneficiary Designations:

Considerations

 Multiple and Contingent Beneficiaries

 Minors or Persons with a Disability

 Liquidity Needs of the Estate

Income Tax Implications for Registered Accounts

While beneficiaries may receive funds directly, they are not without impact to the estate of the deceased. Tax implications need to be considered before naming a beneficiary. If the beneficiary is a spouse or common law partner, tax implications can typically be deferred.

If the beneficiary is someone other than a spouse, than the estate most often becomes responsible for paying tax on the entire amount an RRSP at the time of death.

CRA generally considers the beneficiary and estate to be jointly liable for taxes owing, however; the CRA will pursue payment from the estate first.

Most plans allow more than one beneficiary to be designated. For example, if you have two or more children, funds can be divided equally among them.

Multiple and Contingent Beneficiaries

Plan holders may also be entitled to identify a contingent beneficiary. This means, if your primary beneficiary predeceases you, you can select who would then be entitled to the funds.

Minors/Person with a Disability

 Minor beneficiaries: If you designate a minor as a beneficiary of your account, you will likely be prompted to designate a Trustee, as well. The Trustee will be responsibly for managing and distributing funds until the child achieves the age of majority. This could have unintended consequences. For example, trustees are only valid until the child is 18. This means the child could receive a large sum of money at age 18.

 In many cases, a trust that is established in your Will makes more sense for minors than a direct beneficiary designation.

 Disabled Beneficiaries: A trust set up through your Will is typically a better choice for a disabled person than a beneficiary designation. This can be for several reason. The most common issue being that a windfall of money can interrupt social assistance payments or other government supports. Depending on the nature of the disability, it may also be prudent to leave money in a trust so that the money can be properly managed for the individual.

Beneficiary designations shine because they allow heirs to receive funds quickly and discreetly. Unfortunately, this has the potential to cause issues for your estate if proper planning is not completed.

Beneficiary DesignationsLiquidity Needs of the Estate

Estates often need to cash to pay tax bills and fund the instructions left in the will. If all/most assets are passed outside of the estate, your estate may have a cash flow issues.

A common solution to this problem is Life Insurance. This is recommended strategy for most individuals. Life insurance provides the estate with cash to settle any outstanding liabilities.