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Designated Beneficiary Uncertainty?

By Wills & Estates Team (posts)

One of the most surprising developments in estate law over the last number of years has been increasing uncertainty over designated beneficiary assets – life insurance, RRSPs, RRIFs, and TFSAs being the most common – which many people assumed were “rock solid” and immune to challenge.

How can a beneficiary designation be challenged?

There are numerous ways that a beneficiary designation may be challenged. Many of these mirror challenges to the validity of wills. For instance, a beneficiary designation made by a person who lacked the mental capacity to understand what they were signing, or who was forced or unduly influenced to sign it, would be invalid, and the asset would either fall into the estate or go to the person who had been designated as beneficiary prior to the invalid designation. It is important, therefore, for steps to be taken to make sure that the person has capacity and is not being forced/unduly influenced – but most professionals will have been aware of this already.

But two other challenge types may be trickier…

First, a beneficiary designation may be subject to the law of resulting trust, which creates a legal presumption that the designated beneficiary does not actually get the asset upon death for themselves, but is required to hold it in trust for the deceased’s estate (and ultimately pay it to the beneficiaries of the Estate).

Unfortunately, Canadian Courts have not sorted out whether beneficiary designations do attract this presumption – a 2020 Ontario Superior Court case decided that the presumption did apply, but a very recent 2021 decision in a different case from the same court decided that it did not apply. We can only hope that this is clarified soon, but in the meantime the possibility that the presumption applies to beneficiary designations creates significant uncertainty for these assets. This uncertainty can be mitigated and even eliminated by appropriate recording of the owner’s intentions.

Another way that a beneficiary designation may be challenged is where the beneficiary has given up their right to receive the asset upon death of the owner. This often arises after a separation or divorce, where each party agrees to forego any claim to the other’s property or estate, but then one of them forgets to change the beneficiary of their asset, and dies, leaving the ex-spouse still being the named beneficiary.

The Supreme Court of Canada has clarified that the legal doctrine of unjust enrichment can apply in these circumstances, which will generally result in the asset not being paid to an ex-spouse who agreed not to make any claims – even though that ex-spouse remains the designated beneficiary. While most people would agree that that is the fair result, the Court’s willingness to look beyond the beneficiary designation will no doubt open up avenues to somewhat murkier sorts of challenges.

Takeaways for Professionals

Ultimately, professionals who deal with these assets need to be aware of these types of challenges and make sure appropriate advice is given to clients to limit the uncertainty. In some cases, it will be prudent to refer the client to an experienced estate planning lawyer for this purpose.

If you have questions, contact a member of our Wills & Estates team.

We’re here to help.

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