View
225
Download
3
Category
Tags:
Preview:
Citation preview
Beneficiary Designations:Why, When and How?
Presented by:Martin R. Grimba, BA. FLMIRVP 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 whencreating 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
Owner BeneficiaryTax BenefitDuring Life
Tax Benefitat Death
Taxpayer Estate NoneDeath benefit
is donation
Charity CharityAnnual
premium is adonation
None
Taxpayer Charity NoneDeath benefitis 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
Recommended