Tag: RRSP/RRIF

What’s in a word? Literally everything if it’s a beneficiary designation

Jeffrey Brittain “was involved in the insurance business from which he had amassed considerable wealth. He lived on a working farm in Princeton, Ontario with his son in a house which he shared with his elderly mother.”

But this isn’t so much a story of one of our successful brethren in the wealth field as it is a sobering reminder that the best of intentions may be worth squat if not put into writing.  

You see the reason the details of Mr. Brittain’s life appear within quotation marks is that these are the opening words of the judgment in an estate dispute over his $1.75 million RRSP.

The live-in couple

Jeffrey Brittain was just 53 years old when he was killed in a farming accident in the spring of 2002. He had been married twice before and had upcoming summer plans to marry his live-in partner Lora Belvedere.

There was no pending wedding proposal or promise of an RRSP, however, when the couple met in 2000 and began living together at the Princeton farm in June of that year. Those facts would bear consideration in Ms. Belvedere’s later claim to the RRSP proceeds.

Mr. Brittain appears to have been a practical thinker – some might say a pessimist – in terms of the sustainability of relationships. He had held a cohabitation agreement with his second wife, and within a couple of months of living with Ms. Belvedere had suggested a similar arrangement. In fact, during a social visit with the mutual friends who had introduced the two, Mr. Brittain produced a photocopy of that earlier document with some proposed amendments penciled-in.  

The terms evolved to include a commitment that she was to be beneficiary of his RRSP holdings if the two were still together at his death, and a support amount for Ms. Belvedere should the couple separate before then. Upon further exchange and reflection, the decision was made that he would attend upon his lawyer to produce a fresh document, rather than their signing the marked-up discussion piece.

Best of intentions

The execution of the cohabitation agreement was to be the first in a sequence of events, including a revised Will to confirm the support commitment, and of course beneficiary change forms to be filed with the various RRSP suppliers.  

Unfortunately for Ms. Belvedere, these steps had not been completed by the time Mr. Brittain met his untimely death about 18 months later. In particular, the RRSP beneficiaries remained as before, so all that was left to her were notes and oral expressions of intention.  

Mr. Brittain had not been entirely idle, however. He had indeed revised his Will, principally to make his son the primary beneficiary, and had also removed Ms. Belvedere as beneficiary of his $100K group life insurance. She was aware of both these actions.

In addition, Mr. Britttain had referred to an earlier Will in notes provided to his estate planner in early 2002, leading the trial judge to note: “All of this makes it extremely hard to determine Brittain’s true intent even if able to determine what he said he intended.”

Get it in writing

Without the explicit RRSP beneficiary change, therefore, Ms. Belvedere would need to lodge her claim against the estate on the basis that Mr. Brittain had been unjustly enriched. She sold her house and car, extended her health care and employment perks to him and his son, provided her household labour and limited her outside career workload … and the claim succeeded, at least at trial.

On appeal, the court held that the facts did not sufficiently fit within the legal test for unjust enrichment. Whatever enrichment Mr. Brittain received and corresponding deprivation Ms. Belvedere suffered, it did not entitle her to claim against the estate for any amount, let alone $1.75 million.

In that light, consider that had the beneficiary change forms been completed, she would have received the full RRSP proceeds directly. For the sake of a recorded word or two, it was effectively an all-or-nothing proposition.  

Perhaps obviously, the lesson for individuals generally – and for advisors of all stripes – is that beneficiary designations are very powerful tools that should be wisely considered, expeditiously filed and conscientiously monitored.

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Curiosity — Other recent cases of unchanged beneficiaries:

Gaudio 2005 – Separation agreement had general mutual estate releases, but wife successfully claimed both group life insurance and RRSP as husband failed to change recorded beneficiary with the respective suppliers.

Conway 2006 – Despite separation agreement, wife successfully claimed as the recorded beneficiary under group life insurance, but was denied a pension benefit as the equalization payment from her husband had explicitly taken pension value into account.

Richardson 2009 – Wife claims insurance despite separation agreement limiting her entitlement to a specific date; designation remained unchanged for 12 years longer than agreed, including premiums being paid by second wife believing she was beneficiary.

Safeguarding RRSPs against creditors

Is my RRSP protected from creditors? Clients are keen to know how bankruptcy affects this key savings vehicle.

Whether it’s nervous clients reviewing their depleted nest eggs, or troubled clients readjusting to a job loss, this is one question financial advisors have probably been asked fairly often in recent times.
The easiest answer is: Indeed—in the case of bankruptcy—except for deposits made within the 12 months leading up to the bankruptcy.

And isn’t it rather fortuitous that the federal bankruptcy amendments, exempting RRSP/RRIF assets from seizure in a bankruptcy, came into force just about a year ago, July 7, 2008, right around the time financial markets began to show us quite forcefully what had been brewing within the economy. 

Short of bankruptcy, creditor protection would depend on the type of plan being held, whether it is lifetime or estate protection at issue, and what province or territory the client currently resides in.

Insurance-based plans

For insurance-based plans, protection is available against lifetime creditors if one or a combination of certain family members—spouse, child, grandchild or parent—is named a beneficiary. In the common-law jurisdictions, it’’s determined by the relationship of the beneficiary to the annuitant; whereas in Quebec it is the relationship to the owner. The distinction is irrelevant in the case of RRSP/RRIFs since the annuitant and owner are one and the same.

Insurance-based plans also allow protection against estate creditors if any beneficiary is named, family or otherwise. In either case, insurance-based plans are not automatically protected, but rather obtain protection if the owner has taken the active step of naming appropriate beneficiaries.

Lifetime protection, generally

British Columbia, Alberta, Saskatchewan, Manitoba and Newfoundland allow for lifetime creditor protection through their respective judgment enforcements legislation. No beneficiary designation is required; however, in B.C. deposits within 12 months of a claim remain exposed.

The Prince Edward Island law protects only where a family beneficiary—spouse, child, grandchild or parent—is named.
There’s no legislation enabling lifetime protection for residents of Ontario, Quebec, New Brunswick, Nova Scotia, Yukon, Northwest Territories or Nunavut.

Estate creditor protection

In B.C. and PEI, legislation is in place to assure RRSP/RRIF assets bypass estate creditors, so long as any beneficiary is designated (other than the estate of course). 

Case law informs the protection in the remaining jurisdictions. In the 2004 Perring case (Amherst Crane Rentals Limited v. Perring), the Ontario Court of Appeal confirmed that non-insurance RRSP/RRIFs flow directly to a named beneficiary, out of the reach of estate creditors. The relevant phrasing in the Ontario law is the same or similar to legislation elsewhere. While not a certainty, this case would therefore likely have strong influence in those other jurisdictions — Alberta, Saskatchewan, New Brunswick, Nova Scotia, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut. 

The 1997 Clark decision (Clark Estate v. Clark) from the Manitoba Court of Appeal held that RRSP proceeds had to be paid back by a named beneficiary to an insolvent estate, until creditor claims were satisfied. While this has not been directly overruled, it has also not been followed on occasion, so that leaves some uncertainty in Manitoba.

The Supreme Court of Canada ruled in the Thibault decision in 2004 (Bank of Nova Scotia v. Thibault) that a particular RRSP did not constitute an annuity for Quebec purposes, and therefore was available to estate creditors. While Quebec intended to remedy the legislation, the consensus from the legal community is that it falls short, and therefore it remains that RRSPs likely are exposed to creditors.

TFSA creditor protection

Insurance-based TFSAs are likely to be treated the same way as insurance-based RRSPs.
For non-insurance plans, provincial or territorial laws have been amended (or will be in the near future) to allow beneficiary designations. Once in place (some have had to be re-drafted), protection against estate creditors will likely be the same as with RRSPs. Even so, the local law should be confirmed before relying on financial institution forms. 

One thing is certain though, no province or territory has granted lifetime protection to TFSAs.

Certain conditions and classes of creditors may override technical compliance with the rules, even for insurance-based plans.
If a creditor is able to show a fraudulent conveyance or preference, impugned transactions may be reversible. It depends on the province or territory whether intent is a necessary component of the action, or if prejudice to the claimant is sufficient.

It’s possible that matrimonial property, support orders and dependants’ relief claims could impress a trust upon RRSP/RRIF assets. In addition, CRA has been successful in actions taken against registered plans. 

Where any of these complications are present, legal advice should be sought out before making any moves.

TABLE: Expected creditor exposure

The chart below summarizes expected treatment.