Increasingly people are using vehicles such as RRSPs and RRIFs for retirement purposes. One significant advantage of these assets is that that, if the owner designates a beneficiary, the funds pass to the beneficiary on the owner’s death without being subject to probate fees.
However, there are important things to keep in mind when advising clients about these investment vehicles:
1. A beneficiary designation can be challenged on the basis that the owner’s “true intention” was for the designated beneficiary to share the asset with other people.
This issue typically arises where a person (the “owner”) names only one of his or her children, who also happens to be the executor of the will, as beneficiary. In that case, it is possible that the owner simply intended to avoid probate fees, but not to give the whole of the benefit to the executor/beneficiary – rather, the owner wanted the beneficiary to divide the benefit along with the rest of the estate. This argument was used successfully in British Columbia case of Neufeld v Neufeld 2004 BCSC 25.
(In fact, the challenger in such a dispute may also enjoy the benefit of a legal presumption that the owner intended the designated beneficiary to hold the asset in trust for the owner’s estate. This is the same presumption of resulting trust that causes problems with other assets such as bank accounts or property held in joint tenancy. Canadian case law is divided as to whether this presumption applies to beneficiary designations.)
Therefore, as with joint tenancies, advisors should consider documenting their client’s intention with respect to the asset. Is the designated beneficiary meant to actually keep the money for his/her own, or is he/she supposed to divide it up and share it with others?
Ideally, rather than relying only on a simple beneficiary designation, the financial institution documentation would clearly indicate the owner’s true intention, thereby reducing the chance of disputes.
2. The benefit paid to the designated beneficiary is considered a deemed disposition on death. CRA can assess either the estate or the beneficiary as liable for the resulting tax. However, in our experience CRA tends to assess the estate first.
As a preliminary concern, this tax liability may drain the estate and prevent the estate plan from being fulfilled. However, perhaps of more concern, is that the taxation of the estate for money received by only one beneficiary gives rise to potential disputes. For beneficiaries of the estate who are not beneficiaries of the asset, the unfairness of this is infuriating – and understandable: “Why should I have to pay tax on money that he/she got?”
In 2015, this scenario came before the Court of Queen’s Bench in Alberta in Morrison Estate 2015 ABQB 769. The Court was motivated by the unfairness of the situation and held the beneficiary liable to reimburse and indemnify the estate for the tax incurred as a result of the asset received by the beneficiary.
This case may be the tip of the iceberg when it comes to litigating these disputes. In our view, it may soon become prudent practice for advisors to recommend that, when designating a beneficiary for an asset of significance, the client should reconsider the impact on their will and estate plan. Another option would be to document who should be liable for the tax resulting from an asset passing outside the estate.
Advisors should point out to clients that there can be negative implications of placing assets into these designated-beneficiary vehicles. This includes risks of disputes about both underlying ownership and the tax liability. However, there are ways of mitigating the risks – in particular, documenting intentions with respect to ownership and tax.