Worksheet: Naming beneficiaries: look before you leap
Many Canadians don’t put a lot of thought into naming their beneficiaries. They assume the rules are straightforward, and that their assets will pass to heirs with a minimum of hassle.
This is a very dangerous assumption
Potential problems
- If your beneficiary designations conflict with your will, the resulting mess will usually need to be resolved in court. This can be costly and time-consuming.
- Recent changes to estate laws in certain provinces can make beneficiary designations in older wills obsolete.
- Clerical errors in beneficiary designations could cause assets to pass through the estate, rather than directly to heirs, costing additional probate fees and delays.
- Many people assume a divorce or separation revokes prior designations. But that's not always the case; it depends on the province.
- Taxes owing on assets outside the estate (example: an RRSP) may have to be paid by assets inside the estate, potentially creating unequal tax burdens for your heirs.
Dealing with family conflict
- When beneficiary designations are made incorrectly or ambiguously, family conflict often results.
- Many people assume their families will be able to settle asset distributions amicably and fairly. In practice, this often isn’t the case.
- Unexpected surprises in the will can cause deep resentment between family members.
- Such resentment can lead to legal challenges as heirs attempt to get “what’s owed to them.”
Possible solutions
- Review relevant statutes and laws in your province to see if recent changes have implications on the way your beneficiary designations will be handled.
- Ensure you change beneficiary designations after a divorce or separation.
- If you move accounts from one institution to another, double-check with brokerages and banks to ensure beneficiary designations are correct after the transfer.
- Name contingent beneficiaries in case your primary beneficiaries die before you do.
- Communicate fully with heirs (your spouse, your children, your family, your business partner(s)) to let them know your intentions.
- Pay attention to the tax implications of your beneficiary designations. Seek professional tax advice to ensure heirs share the burden fairly.