Probate Savings Strategies: Tips and Traps Part II — Beneficiary Designations
Probate of a Will is not necessary to transfer assets passing outside of the Will by way of beneficiary designation. RRSPs, RRIFs, TFSAs, life insurance policies and various pension plans allow the owner to name a beneficiary to receive these assets on death.
By naming a beneficiary, the proceeds will be payable directly to the beneficiary without the need to wait for probate of the Will and without incurring probate fees on the value of the proceeds. This strategy works well for spouses but care must be taken in other scenarios.
Traps to be wary of include:
- Adverse tax consequences. An RRSP or a RRIF that is made payable to someone other than a spouse can trigger a significant income tax to the estate which, if a spouse is named and the spouse transfers the RRSP or RRIF into his or her own RRSP or RRIF, would be deferred until the surviving spouse withdraws the funds.
- Naming a minor as a beneficiary causes a variety of problems because a minor cannot receive these funds. If a minor is named without naming a trustee and without trust terms, the proceeds of these products must be paid into Court and will be invested by a government body until the child is 18. At 18, all of the funds are paid to the child. In such circumstances, the probate fees will be far outweighed by the need to have the funds properly managed and distributed at an appropriate age, all of which can best be done either in the Will or in an insurance or other trust for the proceeds.
- When naming a beneficiary on such an asset, care must be taken to ensure that the entire estate plan works in conjunction with the Will. Such assets are payable to the beneficiary while the taxes that may be triggered by them are payable by the estate. For example, naming one adult child as the beneficiary of a $200,000 RRSPs and leaving an estate worth $200,000 to the other child will not actually result in equal gifts to the two children since the RRSP will trigger a tax that is payable by the estate.
- In a beneficiary designation, there is no provision for the issue of one of the beneficiaries if he or she dies before the owner. For example, if a mom names her son X and daughter Y as beneficiaries of her insurance policy and X dies before her, all of the insurance will go to Y and X’s children won’t receive his share. The entire estate plan, including the Will, has to be prepared to consider and address this potential problem.
Estate planning can be complicated. Get expert legal and tax advice when naming beneficiaries on life insurance and other plans to ensure the scheme of your estate plan works as you expect.
Mary Wahbi, JD, TEP, is a partner at Fogler Rubinoff LLP. She is a long time Wellspring volunteer and a member of the Planned Giving Advisory Committee of Wellspring. Her practice focuses on estate planning, estate administration, corporate reorganizations and business succession planning. Mary can be reached at firstname.lastname@example.org, or (416) 864-7629.
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