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Beneficiary Designations – Not the End of the Story, after all

By Tyson McNeil-Hay (posts)

ALERT – new development – as it turns out, a beneficiary designation is not a “sure thing” – even a beneficiary designation can be challenged.

We recently wrote about disputes that can arise over assets with designated beneficiaries, such as RRSPs, RRIFs and life insurance. Just after that bulletin, the Supreme Court of Canada released a new decision (Moore v Sweet 2018 SCC 52) that provides some clarity to the law on challenges to beneficiary designations – and is likely to lead to more of these disputes.

The type of dispute at stake in Moore might be called “the disappointed beneficiary” or “the unchanged beneficiary” disputes. They most often arise in the following circumstances:

  1. Spouse A designates Spouse B as the beneficiary of an asset such as RRSP, TFSA or life insurance;
  2. Spouse A and Spouse B later separate;
  3. As part of their separation agreement, A and B agree to release or waive any claim to the assets of the other, including the right to share in the estate of the other;
  4. Spouse A fails to change the beneficiary designation to remove B, and when A dies, B remains the designated beneficiary of the asset.[1]

What happens next is that Spouse A’s estate takes the position that Spouse B cannot claim the asset because of the separation agreement. Spouse B, unsurprisingly, takes the position that he/she should get the asset because Spouse A did not change the designated beneficiary.

Prior to the Moore decision, courts across Canada had applied different lenses to the analysis of these disputes, and in some cases reached divergent results. Ultimately, the courts could simply not agree on the effect of the beneficiary designation – did Spouse B get to keep the asset, regardless of the other circumstances (like the release/waiver in the separation agreement), simply because the beneficiary designation had remained in place?

(Moreover, even where courts did look beyond the designation and consider other circumstances, they were divided on which other circumstances were important and about how to interpret settlement agreements and asset legislation.)

The Moore v Sweet decision has resolved the biggest point of divergence in the case law by confirming that the beneficiary designation was not the end of the story, and courts are entitled to look at other circumstances to determine whether it would be unjust for Spouse B to keep the asset.

Essentially, the Court found that even where the legislation governing beneficiary designations says that Spouse B has the right to receive the asset, that doesn’t necessarily mean that Spouse B gets to keep it. If Spouse B would be unjustly enriched because, for instance, Spouse B had given up the right to that asset in a separation agreement, then Spouse B will have to turn the asset over to the estate or the person who ought to have received it.

This Supreme Court of Canada direction that beneficiary designations can be subject to challenge in this way will likely provoke a “run” on these sorts of disputes. Estates and others who wish to challenge the beneficiary designation will view the law as being more “on their side” after this new decision.

The take-away? More than ever, there is no guarantee that the designated beneficiary will get to keep the asset.

[1] That said, in some cases (including Sweet v Moore itself) the scenario is the opposite – the separation agreement provides that Spouse A must keep Spouse B as designated beneficiary, but then Spouse A changes the beneficiary without telling Spouse B. Spouse B then brings a challenge against the new beneficiary.

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