Think before you change beneficiaries

Have you ever wondered how changing your beneficiary could impact your estate plan?

Lawyer Kathryn Bennett, a TEP with Desjardins Financial Services in Toronto, sketches new scenarios on paper so their implications are clear: “I find that’s often very helpful because it helps [you] see what the new plan will look like.”

Here’s how it works.

Estate planning visualizations

A. has 2 children, C1 and C2. C1 has 3 children (GC1, GC2, GC3) and C2 has 1 child (GC4). A wants C1 and C2 to receive equal shares of the estate. A has to decide what happens if C1 dies before A does.

Option 1 would have C1’s three children sharing the half the estate that their parent C1 would have received, and C2 getting the other half. This structure follows the branches of the family tree, with children only inheriting their parent’s share if the parent dies. This is known as a “per stirpes” distribution.

Option 2 would give each surviving child or grandchild an equal share of the estate. This option can end up skewing the estate distribution in favour of the family with the most children. Here, it would mean that C1’s children would get 60% of the estate, while C2 and GC4 would end up with 40%. This is a “per capita” distribution.

A would choose Option 1 as it would mean that each child (or the child’s heirs) would get 50% of the estate.

B. has no children or other family heirs. B wants three friends (F1, F2 and F3) and a charity to receive equal shares of the estate. B has to decide what happens if F1 dies before B does.

Option 1 would have F1’s share split between F2 and F3, so that the friends would share 75% of the estate and 25% would go to the charity. If F2 also died before B, then F3 would get 75% of the estate and the charity would still only get 25%. This structure maintains the original 75-25 split. The charity would only get 100% of the estate if all three friends died before B.

Option 2 would give the two surviving friends and the charity equal shares of the estate. This option would mean that the charity’s effective share would increase to one-third of the estate. If F2 also died before B, under this structure, F2 and the charity would each get half the estate. The charity would only get 100% of the estate if all three friends died before B.

B will choose the option that best reflects which is more important: benefiting the group of friends or giving each heir an equal share, no matter how many of B’s friends are alive when B dies. Make sure the client understands the implications of each option.