Beneficiary Designations: Why, When and How? Presented by: Martin R. Grimba, BA. FLMI RVP Estate Planning - AEIS

Intent of the Designation To ensure the life insurance proceeds, reach the hands of the intended beneficiary – Defined by Provincial Legislation – Part of the estate planning process – Part of the tax planning process – Policy owner maintains control over receipt of the proceeds – Changing designations not like changing ownership (tax implications)

Making a Designation Designation versus Declaration – Designation made in the application form Change by beneficiary designation form – Declaration is made subsequent – i.e. will CAUTION: Subsequent declaration revokes previous designation Notify carrier if subsequent declaration causes a change in beneficiary

Declaration in Will Declarations in a will are always revocable because a will must be revocable – Special rules with wills Will revoked, then declaration is revoked Will and declaration must be in writing If will invalid, declaration may stand – different formalities Declaration in will effective from date will is signed

Types of Designations Revocable – Allows policy owner to deal freely with policy and to change designations without consent of the beneficiary – All designations are considered revocable unless expressed “ irrevocable ”

Consideration Revocation – Must be in writing – Change in beneficiary designation – carrier requires notice – Subsequent designations will revoke original designation

Types of Designations Irrevocable – Must be filed with carrier to give notice – Useful where creditor protection is wanted – Often used to comply with separation agreements or family court orders – Gives certain rights to the beneficiary – consent required – CAUTION: limits what owner can do with the policy Assign the policy, withdraw funds, transfer ownership, change the policy coverage, cannot change beneficiary without consent But consent or notice is not require for all transactions – i.e. lapse

Considerations Creditor Protection – Named beneficiary and not estate avoids probate and creditors of the estate – Provincial legislation prevents creditors of owner from seizing contract during lifetime of the insured “ Preferred Class ” – designation in favour of spouse, children, grandchildren, parent of the insured – exempt from seizer during lifetime In Quebec - class is wider, includes ascendants and descendants of owner – Irrevocable beneficiary

When Making a Designation When and where are proceeds needed? – Examples Loss of key person Business debt Fund buy-sell obligations Replace income Equalization of estate Support dependents Fund bequests (i.e. charitable) Final expenses, estate costs Tax liabilities Direct designation to individual avoids probate

What to watch out for when creating a designation Providing name of beneficiary easiest way to identify the beneficiary – Designations may be more difficult if generic “ To my spouse ” “ To my children ” “ To my heirs, assigns, next of kin ” “ Per stirpes or per capita ”

Considerations Multiple and Contingent Beneficiaries – Be clear as to percentages – Where not specified then share equally – default – If two beneficiaries - one dies, survivor takes all – Where three or more and one dies - pro rata – Always wise to name contingent beneficiary – No contingent beneficiary named then back to owner or owner ’ s estate

Considerations Family Law Issues – Divorce or separation will not cause designation to be revoked automatically by carrier – Dependent relief claims can partially or completely override a beneficiary designation – Release in separation agreements do not revoke beneficiary designation unless agreement is specified – Separation agreements or court orders may require designation be in favour of ex-spouse – Upon separation, review with client designations, may be inherent conflict of interest where acting for both parties

Considerations Disabled and minor beneficiaries – Where disabled beneficiary – Henson Trust Discretionary Avoids termination of government benefits – Minor beneficiary can not be paid proceeds – Guardian of property or Public Trustee – Named trustee avoids payment to minor Avoid “ In Trust For ” Formal document avoids lump sum payout at age of majority Provides roadmap for trustee – allowed to encroach on capital

Considerations Minor Beneficiary – Can an insurance trust play a role? – Create a “ Declaration ” Implementation – By will – By trust document – By hybrid method

Considerations Death of a beneficiary – Contingent or secondary beneficiaries recommended – Proceeds will be divided equally amongst surviving beneficiaries unless stated otherwise – Where no surviving beneficiary – payable to owner or owner ’ s estate

Considerations Simultaneous death – Where life insured and beneficiary die at the same time Proceeds paid as if beneficiary predeceased life insured Life insured is deemed to have survived the beneficiary unless the designation or declaration say otherwise

Considerations Power of Attorney (PoA) – Attorney can not make designation in first instance Akin to making a will – Testamentary in nature Not in legislation as a limitation Discussions on clarifying this issue are occurring – Where irrevocable beneficiary is incompetent Requirements will vary amongst carriers – May need proof of incapacity – Will in most instances have to provide a copy of the PoA

Considerations Charitable Giving – Proper legal name of charity – Doctrine of Cy-press may apply – Ownership or Designation – different tax outcomes

Considerations OwnerBeneficiary Tax Benefit During Life Tax Benefit at Death TaxpayerEstate None Death benefit is donation Charity Annual premium is a donation None TaxpayerCharity None Death benefit is donation

Considerations Corporate Beneficiary – Proceeds flow to CDA – CDA credit = proceeds less ACB of policy – Tax-free capital dividend can be paid to shareholders – Drawback – proceeds subject to creditors of the corporation Holdco may work

Considerations Shareholder benefit – Insurance corporately owned and pays premiums – Shareholder or related party beneficiary Shareholder benefit issue – Value of benefit – based on life insurance premiums

Conclusions Beneficiary designations not as simple as they may seem Always be prepared for contingencies and changes in circumstances

Support Materials Manulife – Tax Topics – Beneficiary designations, Creditor protection and insurance trusts – Guides and checklists – Insurance trusts and beneficiary designations