Tag: Will

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.

5 things to learn from a Client’s Will

Whether you see it as a core responsibility or a value-added proposition, reviewing a Client’s Will can be both a goldmine of information and a minefield of liability.  This is not a matter of second guessing legal advice, but rather a due diligence exercise to ascertain whether your financial advice properly aligns with the client’s estate planning.  

Effective financial advice requires a reasonable knowledge of a client’s intentions, and a comfort level that those intentions have been properly reflected in plans undertaken.  

A client may state and believe that his or her Will and surrounding estate planning is in order, but that may not necessarily be the case.  By digging a little further an advisor may uncover details that change the financial advice otherwise offered, or may discover information gaps that should be pursued with the client’s lawyer to assure that the combined advice achieves the intended results.

With one eye on providing useful and organized assistance to your clients, and the other firmly on your professional liability, take the time to advise the client in writing ahead of time what you are looking for in reviewing a Will and what you plan to do with it when you find it.  This way you manage expectations by tightly framing the inquiry, and in the process limit the potential of inadvertently straying into legal advice territory or otherwise having some unfortunate miscommunication.

Here are some high points to consider:

1) Is there a Will at all?

Despite an advisor’s thorough financial planning, the Will remains an important safety net that needs to be in place to catch things that are not disclosed or otherwise not adequately managed through the features available in financial products.

Apart from this protective attribute, the Will can be a launching pad for more sophisticated tax and estate planning that complements and boosts the value of financial product choices.  In particular, a Will can be used to create one or more testamentary trusts that can multiply future access to lower marginal tax brackets, which is the core of legally sanctioned income splitting.

Finally, a Will can be a great source of emotional comfort for the testator (the Will maker) now, and for the heirs in future at an otherwise bleak time.  In turn, this can ease estate administration costs and delays, and assist the advisor in securing an ongoing central role counseling the next generation. 

2) When was the last update?

Not surprisingly, most people are not clamouring to go back to their lawyer’s office to update their Wills any more often than they feel is necessary.  What each person may feel merits a review or revision, however, may not match up with legal reality.

A Will update is usually warranted where 

  • There has been a material change in the value or make-up of a person’s assets
  • Key people (or relationships with them) have changed, or 
  • There has been a significant passage of time

As well, significant matrimonial events – commencing or ceasing a common law relationship, marriage, separation and divorce – can affect a Will, sometimes causing its revocation and other times having little or no effect where one was expected and perhaps relied upon.

In the course of the financial advisor gathering a client’s information, one or more of these conditions may come to light.  If the Will pre-dates these conditions then the advisor may wish to inquire if the client has subsequently spoken with his or her lawyer.  Left unchecked, there is a risk not only that the client’s surrounding estate planning is uncertain, but further that the financial advisor’s own advice rests on a shaky foundation.

3) Are there trusts for minor children?

Every trust shares the characteristic of separating legal ownership from beneficial ownership, but the way each trust operates depends on how it is created.  Simply put, all trusts are not created equal.  

Never have truer words been spoken than when distinguishing trusts arising out of beneficiary designations on retirement plans and life insurance from those created under a Will.

A trust designation is often required in the forms used by a plan or policy issuer where a minor age beneficiary is intended to receive a benefit.  Be careful not to assume though that fulfilling this administrative requirement will be sufficient to properly manage the funds once the trust comes into being.  While the threshold creation of the trust may be achieved, the power to manage the trust property is often severely lacking. 

A Will can be used to cater trust terms that expand or restrict trustee powers and beneficiary entitlements, all as best suits the particular client’s needs.  Here are some fairly common provisions that can be used in a Will, but will not normally be available in a plan or policy trust designation:

  • Allowing the trustee discretion for fuller access to and use of funds prior to the beneficiary’s age of majority without having to seek government or court permission
  • Guarding against the uncontrolled distribution of all accumulated trust funds directly to the child at age of majority (or earlier for rolled over RRSP money)
  • Providing for contingency plans where unforeseen circumstances may arise: Disabilities, creditor problems, matrimonial problems, tax opportunities, etc. 

In uncomplicated situations, the plan or policy proceeds can simply be allowed to flow into the deceased parent’s estate as a conduit to arrive in the trust.  Where probate tax or estate creditors may be significant, more detailed drafting may be required to re-direct the funds into a separate trust that lies outside of the formal estate for these purposes.

4) References to beneficiary designations 

A common feature of many Will precedents is a blanket revocation of all past testamentary dispositions, sometimes including specific reference to beneficiary designations.  These boilerplate type references are likely insufficient to displace a proper existing beneficiary designation unless specific mention is made of the particular plan involved.  

Still, there is a danger that, upon a Will challenge, a solicitor’s notes indicate that the testator had indeed explicitly considered certain plans or policies in instructing the lawyer to draft the Will.  That may bolster a disappointed beneficiary’s argument that the Will supersedes one or more past such designations. 

Of course where a particular plan is mentioned, whether or not it is one managed through that financial advisor, that is a red flag.  Clearly the client (with the lawyer’s assistance) is willing to use the Will as an active instrument affecting financial products. Without clear and direct communication between the financial advisor and the lawyer, there is a risk that distribution of that component of the person’s estate becomes an unintended ping pong game based on whether the client saw the advisor or lawyer last.  

For a case where neither the Will nor the plan determined the ultimate recipient of life insurance proceeds, see the accompanying article on the Ogilvie case, entitled “Whither those life insurance proceeds.” 

5) Re-confirming beneficiaries, spelling and locations

Sometimes people give conflicting instructions to their professional advisors.  It could be: 

  • A considered uneven distribution
  • An unintended double counting of assets
  • A secret benefit for someone unknown to others
  • A failure to account for tax liabilities, or 
  • Just a misunderstanding of how assets may devolve if there is a death out of order.  

Clearly, where registered plans, insurance policies and Wills show different beneficiaries or significantly varied entitlements, it is worth inquiring whether this is intended or inadvertent.  

For a case where the apparent initial beneficiary entitlements were redistributed based on a judge’s exercise of discretion, see the accompanying article on the Doucette case, entitled”Challenging joint accounts.”

As to spelling of names, well typos do occur.  Whether the error is in the past information that made its way into the Will or in the current information provided to the advisor, a correction needs to be made.  It may in fact turn out that multiple names have been used in the past by the client, beneficiaries or other key people.  Either way, contradictory information can upset one or more elements of the financial and estate plan. 

With respect to the location of various people, a Will may refer to the general residence of an executor, trustee or beneficiary.  If these references are out of date with the advisor’s current information, particularly where provincial or national boundaries have been crossed, it may be that a Will revision (or at least a review) should occur.

In all cases this is not rocket science, just conscientious attention to detail.

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As stated off the top, inquiring about a client’s Will is a part of an advisor’s due diligence in providing the best – and best-suited – financial advice the advisor is capable of delivering.  A respectful, organized and informed inquiry will go a long way in solidifying the advisor’s value to the client.

Beyond that, such inquiries can be a springboard for discussions with a client’s estate planning lawyer, trustees and adult beneficiaries in an effort to complete the circle of planning for this client, and open up planning opportunities on into the next generations.

For some inheritances, timing really is everything

The adage timing is everything is a convenient phrase that is often used for emphasis in situations where it is not entirely true.  In the case of determining entitlement to an inheritance though, it could very well be right on the money. 

Back in 1991, Nora Mulligan provided in her Will both for her three (adult) children of her first marriage, and for her second husband Arthur.  The children were bequeathed such “money” that she may own at her death, and her husband was to continue as surviving joint owner of the house and beneficiary of the residual estate assets.

In May 2005, Nora’s sister died without having made a Will.  According to the rules of intestacy of the province where the sister resided, Nora and her one other sibling were the statutory beneficiaries under the intestacy.  The Public Guardian’s office in that other province initiated proceedings to administer the estate, which consisted of “money” type assets, out of which Nora was to receive about $75,000.

In November 2005, the Public Guardian’s application was granted, and the sister’s estate was ready to be administered.  Unfortunately, Nora had died some weeks earlier in October 2005 so she would not be able to enjoy that inheritance personally.

As the sole named executor under Nora’s Will, Arthur distributed all of her $115,000 “money” to her children; the $60,000 house passed to him by right of survivorship.  Perhaps not surprisingly though, a dispute arose as to whether the $75,000 forthcoming from the sister’s estate was in turn to be characterized as “money” when received in Nora’s estate.

The matter progressed to court, and after a review of relevant case authorities the judge held that Nora had “no interest in the specific assets in her sister’s estate… [and] …those assets, accordingly, cannot be the subject of a specific bequest.”

For Nora’s children to have succeeded, Nora would have had to survive not only up to the grant of administration to the Public Guardian, but further to the point where her estate entitlement was properly distributed to her while living.  Things may have been different if Nora’s sister had executed a Will that might have allowed for a quicker administration, or if Nora’s own Will had been drafted to cover such contingencies.

As it turned out for Arthur, timing really was everything, and he took that right to the bank. 

CASE REFERENCE
Mulligan v Hughes 2007 SKQB 123 (CanLII)