Named beneficiary – Page 2

RRSPs, RRIFs and insolvent estates

At issue

Where there is a beneficiary designation on a RRSP or RRIF, the funds in the respective account at the annuitant’s death will be paid to the named beneficiary. Specifically, it is the gross funds that the financial institution will pay out, with the associated tax liability being borne by the estate of the deceased. If the estate does not have sufficient assets to pay the tax liability, the Canada Revenue Agency can seek payment of the associated taxes from the beneficiary.

Depending on circumstances, this can cause troublesome complications for a beneficiary, and also for the executor of such an estate.

2011-04022391I7 (E) – Insolvent Estate of a Deceased RRSP Annuitant

A deceased’s estate has primary liability for the income tax associated with inclusion of RRSP proceeds in the deceased’s terminal year income. Under ITA s.160.2(1), a beneficiary is jointly and severally liable, and CRA may look to the beneficiary to pay the proportional taxes when an estate is insolvent.

This liability applies whether the beneficiary is a Canadian resident or non-resident. The law cannot however be enforced against a non-resident, as courts of one country will not generally enforce the revenue laws of another country.

2011-0429101C6 (E) – 2011 STEP Conference – Q20 – Insolvent Estates

CRA responded on a series of questions involving insolvent estates.

The Crown has priority over other general estate creditors, though it will stand behind secured creditors. Once an estate is assigned into bankruptcy however, the Crown priority ceases to apply.

With respect to a RRIF that is paid from a financial institution to one or more named beneficiaries, any personal liability of the executor of the deceased’s estate will be limited to the assets under his or her control and that he or she has distributed. Presumably a direct payment to a plan beneficiary from the institution without intervention of the executor would not be determined to have been under the executor’s control.

Where an executor contemplates using estate assets to object to an income tax assessment, there is a risk that the executor could be liable for taxes if the estate is or becomes insolvent. If the executor engages an accountant on behalf of the estate for this purpose, there is a risk that the executor could be personally liable for that cost. Similarly, if the executor engages an accountant using his/her personal funds, there is no certainty that the estate will be obliged to reimburse the executor. A suggested alternative in this CRA letter is for the executor to assign the estate into bankruptcy, leaving it to the bankruptcy trustee to decide whether to object or appeal.

Practice points

A named beneficiary should bear in mind the potential tax implications when receiving RRSP or RRIF proceeds. Before committing those received funds to a large expenditure (eg., travel, a capital purchase or lump sum mortgage payment), the beneficiary should have an understanding of the deceased’s financial circumstances. Such a beneficiary should proceed cautiously if there is a concern about the deceased’s solvency and/or the realizability of assets now held in the estate.
Prior to accepting the role, a named executor may wish to look into the financial status of the deceased, and in turn the prospects for the estate. To the extent the estate is or becomes insolvent, the executor may merely be acting to realize assets for the benefit of estate creditors, and not estate beneficiaries.

Revoking a spouse beneficiary on separation

At issue

The breakdown of a marriage is seldom a pleasant or simple process to work through. One potentially problematic aspect of this is how to deal with the revocation of life insurance and RRSP/RRIF/pension beneficiary designations. Despite expressed intentions and commitments in a separation agreement, additional positive steps may be necessary to give effect to a purported change.

Here is a recent trial court decision where an ex-spouse remained on record as life insurance beneficiary, and a couple of appeal court decisions that provide further context.

Love v. Love, 2011 SKQB 176

The separation agreement made reference to the husband’s pension, but made no mention of the group life insurance on which the wife was the named beneficiary. Following separation, the husband sent an email to his employer’s human resource department requesting the necessary paper work “to change the beneficiary on my pension etc. (from my former wife to my son).” After his death, the incomplete form was found in his files.

The court held that an email could suffice as a “declaration” to change a beneficiary under the Saskatchewan Insurance Act. On the facts however, neither the reference to the policy (“etc.”) nor the new beneficiary were sufficiently clear, particularly as there were actually three sons.

Richardson Estate v. Mew, 2009 ONCA 403

The Ontario Court of Appeal provides a useful summary of cases involving the interaction of separation agreements and beneficiary designations, and enunciates some principles for analyzing the cases:

“A former spouse is entitled to proceeds of a life insurance policy if his or her designation as beneficiary has not changed. This result follows even where there is a separation agreement in which the parties exchange mutual releases and renounce all rights and claims in the other’s estate. General expressions of the sort contained in releases do not deprive a beneficiary of rights under an insurance policy because loss of status as a beneficiary is accomplished only by compliance with the legislation. The general language used in waivers and releases does not amount to a declaration within the meaning of the Insurance Act.”

Martindale Estate v. Martindale, 1998 CanLII 4561 (BCCA)

The British Columbia Court of Appeal held that, on the facts in evidence, it would be a breach of the separation agreement for the ex-husband to claim insurance proceeds from the death of his ex-wife. Instead, he received the proceeds only as trustee of a constructive trust for the benefit of the intended beneficiaries.

In the words of the Court, “it would be against good conscience for the appellants to keep this money because Mr. Martindale had, by the separation agreement, surrendered any right he might have had to the property of the deceased.”

Practice points

Separating spouses and their lawyers should be sure to direct their minds and their drafting to explicitly address life insurance and RRSP/RRIF/pension beneficiaries in the separation agreement.
The Martindale result should be viewed as the exception to the general approach expressed in the Richardson case. To achieve greater certainty, separated spouses should change beneficiaries using each respective institution’s forms and procedures.

Misadventures and myth-adventures in naming beneficiaries

The act of beneficiary designation is a microcosm of estate planning. With the stroke of a pen or a few taps on a keyboard, this final step in the life insurance contract cycle is completed.

And there’s the myth –

Never believe that the act of naming a beneficiary is complete just because boxes have been filled, forms filed and contracts issued. One would think that certainty is assured if all these steps have been carried out correctly, but that’s simply not the case.

At best one can assert that compliance with technical rules fulfills professional responsibilities and creates reasonable expectations in most circumstances. Like broader estate planning, however, policy payout may end up being played out against a backdrop of conflicting personalities, competing priorities and contradictory contentions.

This fragility is perhaps most clearly brought to light in the intersection of insurance contracts and matrimonial law. Here is where that microcosm of estate planning comes into the sharpest focus in the form of estate litigation.

Life altering fortunes are on the line, emotions rule, and fates are placed in the hands of a judge working with often imperfect information. And sometimes there are imperfect results, especially if you’re on the short end of the gavel, so to speak.

Here are two recent cases that help illustrate the challenges that can arise where conflicting language and actions impact upon the distribution of life insurance proceeds.

RBC Life v. Monaco, 2010 ONSC 75

In the province of Ontario, as with most common law provinces, a beneficiary change form need not be in any specific form to be valid. As well, only irrevocable beneficiary designations need to be filed with an insurer to be valid, at least with respect to the irrevocability. Consent of any existing irrevocable beneficiary would also be required. The only requirement for non-irrevocable designations is that they be in writing.

Paolo Monaco named his brother as beneficiary on life insurance arranged in 2003, just after commencing a common law relationship with a woman who had a young son. The insurance agent was a friend of a friend of the common law spouse. Paolo died in a motor vehicle accident in 2007.

Following death, the insurance agency requested by email that RBC Life change the beneficiary, but did not initially advise of the death. The form eventually faxed in showed an execution date in 2005 in favour of the common law spouse’s son (in trust), but the policy number was transposed with the common law spouse’s own policy. In fact, the original change form was never found; only a photocopy was ever produced.

As executor of the estate, Paulo’s brother alleged that the produced form was a forgery, and he would have the onus to prove so on a balance of probabilities.

The judge remarks on the dilemma of validating a photocopy, the untimely filing, and the weak testimony of most of the witnesses. He was notably pointed in stating that the insurance agent’s evidence was “not very impressive” and that his “evidence as to the chronology of events was lacking.” In the competition between handwriting experts, however, the judge favoured the evidence upholding the form, and therefore the alleged fraud was unproven.

At the very least, there is a lesson buried in there with respect to proper record-keeping and conscientious follow-up.

Elton v. Elton Estate, 2010 NLCA 2

It is generally possible, at least in the common law provinces, to uses one’s Will as a written instrument to make or change beneficiary designations on life insurance contracts. To do so, the relevant insurance policy must be in place prior to the execution of the Will, and such policy must be clearly identified.

In Elton, the Newfoundland Court of Appeal accepted that the provision in Brian Elton’s Will adequately identified a number of life insurance policies totaling $1.75 million naming his wife Kathryn as beneficiary. The Will provision refers to transferring to her “proceeds of life insurance policies already naming her beneficiary and any additional insurance monies necessary to provide her with a total of $450,000.00.”

The issue before the court was whether the Will phrasing revoked the designations and capped Kathryn’s entitlement to $450,000, or if she was entitled to this dollar amount in addition to the direct designation proceeds. As a further ingredient in the mix, the Will provision incorporated a domestic contract by reference. Sadly, the day after he executed the Will, Brian Elton took his own life.

Whereas the trial judge found in favour of Kathryn, on appeal the decision was reversed and her entitlement was capped at $450,000.

Of particular interest and instruction for financial advisors is the following statement from the appeal court summarizing the trend in interpretation from the bench in such cases: “It would be incorrect to state that the Life Insurance Act or its requirements must be strictly interpreted as that would be contrary to established principles of statutory interpretation.”

The simple lesson

Despite the black letter of law in legislation and regulation, especially as evidenced by the statement in Elton, it seems there will always be a degree of grey when it comes to naming life insurance beneficiaries.