This article is not intended for residents of Quebec.
When you open a registered account or buy a life insurance product, there’s a section in the application form where you can name one or more beneficiaries. These beneficiary designations allow you to pass the assets directly to specific individuals or charities after your death and that has a number of important benefits, as we explain below. We’ll also discuss what you should consider when you designate beneficiaries — that may not be as straightforward as you think!
What types of accounts and products provide this option?
The investment accounts are (in all provinces except Quebec):
- tax-free savings accounts (TFSAs)
- registered retirement savings plans (RRSPs)
- registered retirement income funds (RRIFs)
- registered pension plans (RPPs)
The life insurance products are:
- segregated funds
- permanent or temporary life insurance contracts
5 advantages of designating beneficiaries
Designating beneficiaries directly for a registered account or insurance policy can provide several important benefits, including:
1) Avoiding probate: Probate is a process whereby your executor1 applies to court to approve the will. The probate process is often lengthy and might cause delays in distributing your estate assets to your loved ones. Designating beneficiaries directly for these assets (where possible) allows them to pass outside your estate, thereby bypassing the probate process, and be paid to your beneficiaries more quickly.
2) Reducing probate fees: Most provinces assess probate fees on the value of the assets that are passing to your beneficiaries under your will. Since probate fees are levied only against assets that pass through your estate, appointing beneficiaries directly for some of your assets (where possible) helps your estate reduce or avoid probate fees.
3) Providing potential creditor protection upon your death: Your executor must notify your creditors that you have died. As explained above, designating beneficiaries for your assets prevents those assets from becoming part of your estate, which could protect them from claims by creditors. However, if the Canada Revenue Agency or Revenu Québec is the creditor, it can collect any income tax — directly from the designated beneficiaries — that arises on the asset that is passing outside the estate.
4) Providing a measure of privacy in your affairs: During the probate process, any document (including your will) that your executor provides to a court becomes a public document that any member of the public can see. Since assets with beneficiary designations are not governed by your will (unless you appoint your estate as the beneficiary), your executor is not required to provide them to the court. As such, your beneficiary designations will likely not become public documents. This provides you with a measure of privacy in your affairs.
5) Avoiding intestacy rules: If you die without a valid will, your assets with beneficiary designations may avoid the mandatory provincial intestacy rules. These rules determine which individuals will receive your assets and the amount each individual will receive. These individuals may not be the people you wish to leave an inheritance to, or you may not wish them to receive the amounts prescribed by the intestacy rules.
Strategies to consider when designating a beneficiary
Plan for your entire estate: When planning the distribution of your entire estate, your beneficiary designations on your registered accounts and life insurance policies should be reviewed to ensure that they reflect your desired estate distribution, liquidity and tax planning goals. Note that life insurance policies owned by your corporation should have the corporation named as beneficiary.
For instance, let’s say you have a RRIF worth $500,000 and an MD Financial Management (MD) portfolio of mutual funds with a value of $500,000. You have two children and you wish them to benefit equally from your estate. You name your daughter as the designated and sole beneficiary of the RRIF (which is taxable to the estate) and you leave, in your will, the residue of your estate to your son.
This will actually result in an unequal after-tax distribution of your assets to those children, since your estate will be the partly taxed on both the fair market value of the RRIF and on the capital gains that arise on the mutual fund portfolio. This outcome could be harmful to future family dynamics and complicate estate administration.
Name contingent or alternate beneficiaries: Even if you have designated beneficiaries on your registered accounts or insurance policies, consider appointing contingent beneficiaries on those assets where possible. Not appointing contingent beneficiaries could mean that if you are involved in a common accident with your primary beneficiary and you both die because of the accident, the proceeds from your registered accounts or insurance policies will fall into your estate and be subject to probate fees and potential claims against your estate. Furthermore, the proceeds will be distributed in accordance with your will, so the proceeds may not end up in the hands of those you would have chosen.
Name a successor annuitant/holder: Instead of naming a beneficiary, you can name a successor annuitant for your RRIF and a successor holder for your TFSA, but it has to be your spouse or common-law partner. Your spouse can take ownership of your RRIF or TFSA without having to transfer funds out of the account.
To learn more about estate planning and beneficiary designations, contact an MD Advisor*.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
1 An “executor” is called a “liquidator” in the province of Quebec and an “estate trustee” in the province of Ontario.
Estate and trust services are offered through MD Private Trust Company.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals.