Tag: Named beneficiary

Non-spouse beneficiaries of registered plans – Form can affect tax incidence and entitlements

Estate planning and tax planning intersect in many ways.  One of the places where this can have very significant property and tax implications is in the naming of non-spouse beneficiaries on registered plans, whether as contingents or simply in the absence of a spouse. 

This can be relatively uncomplicated where spouses intend to transfer all their wealth to the survivor of them at first death, including full tax-deferred rollover of registered plans.  Even after that event, things will often still be fairly straightforward, assuming an intended equal distribution among the mutual children through the survivor’s estate.  (For the sake of discussion, let’s assume no minor children or disabilities to contend with, which would add many more wrinkles to the analysis.)

Commonly the children will be named as estate beneficiaries, with parallel beneficiary designations on registered plans.  Generally this is premised on avoiding probate tax on the registered plan (in provinces where this is a concern), keeping it out of the reach of the deceased’s creditors, speeding the release of the proceeds, and perhaps reducing estate administration costs a bit.

While in most cases those beneficiary designations will indeed contribute to an efficient estate transfer, there may be situations where unexpected and undesirable results can arise.  Here are some examples.

RRSP or RRIF beneficiaries

Suppose a son and daughter were named as beneficiaries of both the will/estate and a RRIF, but the son predeceases and had two sons himself.  

Absent a detailed beneficiary designation with contingencies having been filed with and accepted by the financial institution, likely the full RRIF proceeds will go to the daughter.  (Consider that the son and daughter were likely contingent on the original and possibly unchanged designation, so to go beyond that would have been a third stage designation.)

On the other hand, assuming the will had been drafted with the common phrasing used to pass inheritances down generations (“issue per stirpes”), the formal estate would be effectively split evenly between the daughter on one side and the two grandsons on the other.  However, proceeds of the RRIF would have been brought into income in the deceased annuitant’s terminal year. (No rollover exceptions for spouse, minor child or disabled child apply here.)  This is a debt to be borne by the estate, effectively half imposed on each of daughter and her two nephews.  

Daughter could choose to compensate her nephews for the disproportionate results, but is not legally required to do so.  

Beneficiary on pension

Compare the result if the parent’s plan was instead in the form of a registered pension plan.  Unlike the inclusion of RRSP/RRIF proceeds in the deceased’s terminal income, a lump sum payment from a pension is generally taxable to the named beneficiary.

Assuming again a simple beneficiary designation where daughter was the only living beneficiary, the administrator would have paid to her the plan proceeds, net of withholding tax.  She would then have to report the proceeds as her own income, and reconcile any remaining tax.  Thus, while the grandsons may be shut out of this entitlement (at least initially, subject to their aunt’s inclination), they will not bear any of the tax liability.

As an aside, at a 2012 tax conference, the Canada Revenue Agency was asked whether pension proceeds paid to a named beneficiary at death could be reported and taxed to the estate as a ‘right or thing’.  The CRA acknowledged that there is a very narrow exception, but it did not apply in the particular circumstances.  

Estate as beneficiary?

It’s not hard to imagine things getting much more challenging where there are minors, disabilities, second marriages and blended families.  Though it may seem a bit unconventional, much of the foregoing concerns may be alleviated by naming the estate as beneficiary of the registered plan, coordinated with a properly drafted will. 

Depending on comparative tax positions of the estate and beneficiaries, this could mean more or less tax to be paid.  And of course, probate tax and other estate implications result.

Still, as estate planning is at its core about taking care of the people who survive the deceased person, this may be a small price to pay (literally) to achieve a much greater degree of certainty. 

Causing death, collecting insurance – A public policy predicament

It is a well-known and accepted legal principle that a person should not profit from his or her misdeeds.  When it comes to homicide, it’s irrefutable – or is it?

As any first year law student will tell you, a crime is a combination of the act of transgression and the intention to cause the harm.  This latter component is often referred to as the ‘criminal mind’.  And while the act is the outwardly visible component, our criminal system is designed to punish only intentional criminal activity (with the exception of strict liability offences such as highway traffic matters).  

Accordingly, state of mind is a necessary requirement in finding culpable homicide.  In turn once that has been proven, the Criminal Code gives effect to the public policy by barring the convicted person from receiving any insurance proceeds or share of the deceased’s estate. 

On the other hand, where the accused is the named beneficiary on the deceased’s life insurance policy, and is proven to have caused the death – but with a finding of “not criminally responsible on account of mental disorder” (NCR) – the outcome is not so clear.

A tragic set of facts

Ved Dhingra had been separated from his wife Kamlesh for about six years when he named her as beneficiary under a $50,000 group accidental death policy taken out in 1998.  Her life was also insured under the policy, for which he was the beneficiary.

In 2006, Mr. Dhingra was diagnosed with a serious mental disorder that tracked back many years.  As it happened, Mrs. Dhingra agreed to take him into her Richmond Hill, Ontario home.  Unfortunately, Mr. Dhingra attacked his ex-wife just days later, rendering her unconscious with a blunt object and stabbing her numerous times.  She died of her wounds.

Mr. Dhingra was tried for second degree murder in 2008, and was found “not criminally responsible by reason of a mental disorder”.  He was ordered to be held at a mental health facility, and was subsequently granted a conditional discharge to return to live in the community.

Claim for insurance proceeds

Acting under Power of Attorney, Mr. Dhingra’s son submitted a claim on his father’s behalf in 2007 to obtain payment from the insurance company.  The insurer approved the claim, but did not immediately issue payment.  Subsequent to the criminal trial, and now in his capacity as administrator of his mother’s estate, the son requested that the proceeds be paid to the estate.

Facing conflicting claims, the insurer paid the money into court, following which Mr. Dhingra applied to have the proceeds released to him.  

At court in 2011, Mr. Dhingra advanced the argument successfully applied in a number of American decisions that the public policy rule only applies in the case of intentional killings.  Guided by an earlier Ontario decision, the judge did not find this to be the law in Canada.  In the judge’s words, despite that “he was found not criminally responsible, he still physically committed the crime.”  

Application dismissed.  Mr. Dhingra appealed.

Appeal, success … and back to court

In 2012, the Ontario Court of Appeal (OCA) considered the predecessor Criminal Code provision to NCR, being the insanity defence.   Two cases from the Supreme Court of Canada were reviewed.  In one, the wife was never tried for the death of her husband in a fire she set, but was allowed to share in the estate after being ruled insane during an estate application.  In the other, descendants of a perpetrator in a murder/suicide might have been entitled to an estate share if they could show the man was insane at the time he killed his wife, but the evidence was insufficient.  

Applying these authorities in the present case, the OCA ruled that a finding of NCR did not prevent a person from claiming under a life insurance policy.

However, the Court now turned to the provincial Civil Remedies Act, the purpose of which includes “preventing persons who engage in unlawful activities and others from keeping property that was acquired as a result of unlawful activities.”  Under this law, a forfeiture order may be granted even in cases where there has been finding of NCR, though a court is not to make such an order “where it would clearly not be in the interests of justice”.

Thus, the OCA allowed Mr. Dhingra’s appeal, but stayed the payment of the insurance proceeds for 30 days to allow the Attorney General of Ontario (AGO) to consider whether to apply for a forfeiture order.

A final determination

The AGO did indeed bring a forfeiture application, prior to which there was a procedural hearing to discuss preservation of the insurance funds, the most interesting part of which is the case title:  Ontario (Attorney General) v. $51,000 CDN. 

On Tuesday, March 26, 2013, the matter concluded with a judge ruling against the AGO and awarding the insurance to Mr. Dhingra. 

Dependant trumps named beneficiary – Life insurance deemed to be an estate asset

Contrary to what some in the general public may believe, the law is seldom black and white.  In truth, ‘shades of grey’ may be a more apt description where competing legal claims must be reconciled, especially where moral rules are required to be applied.

One such intersection of legal and moral considerations is Part V of the Ontario Succession Law Reform Act (SLRA), which may allow a dependant of a deceased person to access insurance proceeds that have been paid outside of an estate.  The Ontario Supreme Court considered these provisions recently in Stevens v. Fisher, pitting a deceased’s common law spouse against a prior common law spouse who was the named beneficiary on a group life insurance policy.

A brief family history

Mark Fisher had two children during his marriage that ended in 1988, and two more children during a 10 year common law relationship.  Two further common law relationships followed, about 13 months with Constance Eagles, and 11 years with Camille Stevens up to his death in 2010 at the age of 52.

Mr. Fisher’s estate consisted of a house and its contents, several old vehicles as leftovers from his occasional buy-sell activities, and about $5,000 in a bank account.  These assets were well exceeded by debts that included a fully encumbered line of credit mortgage of $197,000 and over $50,000 of unsecured debt.  Ms. Stevens was the named beneficiary of his only RRSP, valued at $1,911.

There were three life insurance contracts:

  1. Manulife policy for $50,000 payable to his daughter from his first relationship (his son having died many years earlier);
  2. Transamerica policy for $250,000 payable to his first common law spouse in trust for his two youngest children, one of whom is autistic and requires 24-hour care; and
  3. Sun Life group policy for $84,000 through his employer payable to Ms. Eagles.

Neither Ms. Stevens nor Ms. Eagles was aware of the Sun Life policy until after Mr. Fisher’s death.  Specific to Ms. Eagles, a payment of $12,500 had been made in the final settlement (and court order) out of that relationship, with no mention of this insurance policy.

Making the dependant’s claim

There is a very detailed account of the interdependency of Ms. Stevens and Mr. Fisher over their decade-plus relationship.  In addition to having worked for free in a business ventured from which he alone profited $38,000, she generally accommodated her work to his needs.  She had principal driving duties to keep him in touch with his children and his doctors, particularly in his last years when he was in deteriorating health.  During this time, she was unable to maintain steady employment, and they managed mainly on his disability income.  After his death, she has struggled with multiple concurrent minimum wage part-time jobs; in the judge’s words, “Now, the only life she has involves working to survive.”  

The judge had no problem concluding that Camille Stevens is clearly a dependant entitled to claim – but against what?

Ms. Stevens was not claiming a property interest in any estate assets; rather, she was claiming under SLRA Part V to obtain support payments out of the estate prior to distribution to beneficiaries. Despite this distinction, on the face of it such a claim would still have been fruitless when considering the formal estate alone, given the net negative value.

In an attempt to give effect to the claim, Ms. Stevens sought to attach the Sun Life policy payable to Ms. Eagles.  Section 72 of Part V expands the formal estate to items and arrangements over which a deceased had control while living.  This includes such things as gifts mortis causa (ie., gifts just before death), property held under joint ownership with right of survivorship, and life insurance owned by the deceased.  Group life insurance (which is not always owned by the person whose life is insured) is a specifically enumerated item in the section.

Applying law to facts

The court rejected the argument advanced on behalf of Ms. Eagles that Ms. Stevens should also be claiming against the other insurance policies.  The arrangements made to care for those other dependants should not be disturbed.

As to the quantum of the support, it bears repeating that the nature of this type of a claim is not a seizure.  After canvassing a variety of ways to calculate the support amount, the judge fixed it at $65,000 based on a combination of the estate’s ability to pay and the dependant’s need.  To this he added $10,000 for Mr. Fisher’s moral obligation to provide her with more than just the bare legal obligation.  Ms. Eagles was entitled to the remaining value of the policy, being $9,000.