By Patrick McMurchy
People often designate beneficiaries to their RRSPs, RRIFs, insurance policies, and other financial instruments. In fact, it’s often suggested or even required by the investment institution itself.
The general intention of designating beneficiaries is to have the proceeds pass on death to the beneficiary outside the estate. In many cases the pool of designated investments is large and may even exceed the net value of the estate itself. The benefit of designation is often compounded because the estate may have to pay taxes on the collapse and transfer of the investment.
But, contrary to popular belief, it’s not correct to simply assume that the designation of a beneficiary on an asset will override the terms of a will. This issue is particularly important to remember because typically the financial institutions will transfer the asset to the designated beneficiary once a copy of the death certificate is provided to them.
In estate litigation, there are two issues that can arise concerning the designated beneficiary asset. The first issue is the principle of law called the presumption of resulting trust. The second issue is the question of whether or not a will done subsequent to the designation revokes the designation.
A presumption of resulting trust arises where a gift is made and the recipient of the gift made no contribution acquiring the asset. The presumption applies to gifts made to an adult child through a designated beneficiary situation. In these circumstances, the presumption is that the recipient holds the asset not for themselves, but beneficially for the estate.
The presumption means the recipient has the onus of proving that the transfer was intended as a gift to the recipient, and if it is not rebutted, the presumption holds the property falls to the estate.
What is required is evidence of the deceased’s intention at the time the designation was made. It is the deceased’s intention that the court will have to determine.
Somewhat surprisingly, bank documents signed by the deceased acknowledging the effect of the designation have been held to be insufficient to rebut the presumption, even where the evidence is that bank officers explained the effect of the designation to the deceased. More is required such as statements made by the deceased about making or not making a gift, zeroing in on the time the designation was made.
Evidence from the contents of the will may be considered especially when the will was made at or after the time of designation. For example, the will may speak of the intention to equally divide the estate between children, but designations, if effective, may transfer most of the deceased’s property and assets to just one child. The issue becomes what was the true intention of the deceased.
Wills made at or after the time of designation also create the issue of whether the will is intended to revoke the designation of a beneficiary of a particular asset. Wills typically provide that all former testamentary dispositions are revoked.
On this point, in cases involving life insurance designations, there are cases that hold such a revocation clause will revoke the designation and other cases that have held it does not. It’s not clear whether these decisions extend beyond insurance policies which are subject to specific requirements for revocation under the Insurance Act.
This short article is intended to give the reader a general understanding of some of the basic principles respecting the designation of beneficiaries and how that relates to property in the estate. It is not intended as legal advice. In estate litigation, outcomes very much depend on the specific facts of each case.