A key estate planning feature of life insurance is a policyholder’s ability to direct proceeds to a beneficiary outside of a deceased’s estate. But there are limits to this power, as illustrated in the recent Ogilvie Estate case at the Ontario Court of Appeal.
From one perspective, Lloyd Ogilvie left what some might consider an efficient estate: sufficient assets to pay final expenses, and two life insurance policies paying out on his death to his spouse Mary.
But estate matters are about people, and Lloyd also left behind six children, three of whom were minors. The eldest of those minor children lived with Lloyd and Mary, but the other two lived with their respective mothers. Each of those minor children and Mary qualified as dependants of the estate, and indeed claims were lodged for support.
As the direct estate assets were required for those final expenses, the only other potential sources of funds were the life insurance policies. Under the Ontario Succession Law Reform Act, such funds may in fact be drawn into a deceased’s estate if he or she is the owner and life insured on a policy.
In this case, Lloyd owned a $60,711 policy on his own life, and jointly owned a $109,000 mortgage protection policy with Mary that would pay to the survivor on the first death of the two of them.
With respect to the first policy, the court determined that it was available for the support claims, but on the facts of the case only the three children were entitled to such support.
The second policy escaped inclusion for support, even though Lloyd was both an owner and a life insured. The court explained that ownership “is an elastic term”, and that this policy “was not owned by the deceased; it was jointly owned by him and Mary Ogilvie.” Furthermore, while Lloyd was a life insured, the policy was “effected on the lives of both co-owners.” Finally, Mary received the proceeds of the policy not as beneficiary but as an owner: “At the instant of Lloyd Ogilvie’s death, her joint ownership interest swelled to become an absolute entitlement to the proceeds of the second policy.” In sum, the court held that the policy could not reasonably be treated as an estate asset, even under an expanded view allowed for determining dependants’ support.
For financial advisors, the general lesson is that, apart from moral considerations, dependants’ claims are in a specially protected category. Some practice points:
- Understand the scope and limits of dependants’ relief provisions in your province.
- Ask about and understand a client’s relationships so that life insurance ownership and beneficiary designations can be catered to unique circumstances.
- Counsel clients in such circumstances to address their broader estate planning issues through an up-to-date Will and such other procedures and documentation as may be recommend and prepared by a qualified estate planning lawyer.
- Continue to emphasize the creditor protection benefits of life insurance, but never go so far as to utter the phrase “creditor proof.”
Madore-Ogilvie (Litigation Guardian of) v. Ogilvie Estate, 2008 ONCA 39