Get beneficiary designations right

Litigation in the field of beneficiary designations is on the rise. The reasons for this include the significant value of assets that can pass by designation and because the focus of such a challenge is often quite narrow. The designation itself is very brief and these cases typically involve only one issue.

That, however, should not be taken to indicate that such cases may not be costly or protracted. Issues involving beneficiary designations can tie up the administration of an Estate, delay the receipt of assets by the intended beneficiaries or result in the assets being received by people other than those intended.

Broad definitions

There are a number of assets for which people can designate a beneficiary outside of a Will. These include insurance, RRSPs, RRIFs and pensions. Generally speaking, a beneficiary designation doesn’t have to be in any particular form. It should, however, be sufficient to identify the fund, the person (or persons) to receive same and be signed or completed in some manner by the donor. No formal language is required to accomplish all of this.

In Ontario, and depending on the asset, the designation of a beneficiary and its revocation may be further governed or impacted upon in various ways by the Insurance Act; Succession Law Reform Act; Provincial or Federal Statutes governing pensions; and particular terms of a given policy or plan.

For example, under the Succession Law Reform Act (SLRA), a “plan” is defined broadly to include, “a pension, retirement, welfare or profit-sharing fund, trust, scheme, contract or arrangement or a fund, trust, scheme, contract or arrangement for other benefits for employees, former employees, directors, former directors, agents or former agents of an employer or their dependants or beneficiaries.”

Under that SLRA, a participant or donor may designate a person to receive a benefit payable under a plan on the participant’s death, by an instrument signed by him or signed on his or her behalf by another person in his or her presence and by his or her direction, or by Will, and may revoke the designation by either of these methods. A designation in a Will is effective only if it relates expressly to a plan, either generally or specifically, and a revocation is only effective if it relates expressly to the prior designation, either generally or specifically. A later designation revokes an earlier designation, to the extent of any inconsistency. A designation made in a Will can revoke an earlier designation made outside of a Will. The revocation of a Will can revoke a designation made in that Will.

As regards the nature of a designation, or of a revocation, the courts have preferred substance over form. Accordingly, a home-made or holograph designation or revocation made by a participant will often suffice. Again, no particular form or words are prescribed.

Unlike a Will, a designation or revocation contained in an instrument, which is a Will, is not invalid by reason only that the Will is found to be invalid. And, unlike a Will, the revocation of a designation does not revive an earlier designation. That being said, a designation has been considered testamentary by the Courts. In other words, it speaks from the date of death of the donor.

It is important to note that many of the assets which allow for a designation of beneficiary also afford creditor protection. Whether the asset cannot be seized by creditors, and is free to pass to a designated beneficiary, depends upon a number of factors. These include whether the assets are insurance-related, where the funds came from and the interpretation of the applicable beneficiary designation legislation. Not all assets for which a beneficiary can be designated can provide protection from creditors.

Room for confusion

In short, there is potentially a lot of confusion which can arise from competing or home-made beneficiary designations. Problems can arise as well in moving a plan or policy from one institution to another or even from one type of investment or account to another at the same institution. A beneficiary designation does not automatically transfer over to a new institution or to a new account. As a result, an asset which a donor intended to devolve in a particular way, and a donor who likely does not know or may not have been told that a new designation was required, may end up in litigation.

A beneficiary designation is subject to being interpreted and can be challenged on all of the same bases as a Will, namely lack of capacity of the donor, undue influence, lack of knowledge and approval of the instrument and lack of due execution. If a last-dated beneficiary designation is found to be invalid, the asset will devolve on some default basis. For instance, it may devolve under the residue clause of a prior Will or on an intestacy if there is no Will.

As well, it is possible in certain instances to ask the court to rectify a beneficiary designation. To do so, the claimant needs to clearly establish that a mistake was made as regards the person that was to be designated, or the asset described, and that the designation fails to express the intention of the deceased. Typically, the evidence of the claimant alone would not be sufficient. However, where for instance it can be established that both the deceased and the plan holder believed the claimant to be the designated beneficiary but, through mutual mistake, the instrument did not reflect this, rectification has been granted.

Multiple interpretations

In that context, the case of Conner v. Bruketa Estate decided in Alberta this year is also worth mentioning. There, the deceased had intended his pension and life insurance be designated to a former companion. However, he failed to complete designations and his Will did not deal with these assets. The dispute was between the lady friend and those who would take on an intestacy, the deceased’s adult children. The donor had given written instructions to his lawyer for a new Will which indicated that the assets were to go to the companion. The lawyer mistakenly thought his client had already completed designations and so the Will did not deal with them.

The Court held that the deceased’s hand-written instructions were sufficient to constitute an “instrument” and designate the companion, even though they were not signed. The donor had printed their names at the top of the page. In the alternative, the Court would have rectified the deceased’s Will to ensure that the pension and life insurance were received by the companion. This is an exceptional case, in which the deceased’s intention was found to be incontrovertible.

There is some conflict in the case law as to whether the words in a new Will, “I revoke all earlier Wills and testamentary dispositions” revoke a prior designation. Most case law supports that those words are not express enough. That was the result in the case Rider v. McPherson decided in New Brunswick. But, this may be compared with the different result in Ashton.

Not automatic

Many people mistakenly think that separation and/or divorce will revoke a prior beneficiary designation. That is not correct. Rather, while marriage will revoke an existing Will in Ontario, neither separation nor divorce will revoke a prior designation. If the participant or designator does not wish his or her former spouse to receive the benefit of a prior designation, a new beneficiary designation will have to be made. Relatedly, a general release of all claims in a separation agreement will not be sufficient to revoke a prior designation. In the absence of a new designation, specific wording in a separation agreement to the effect that neither spouse will make a claim upon certain specifically enumerated assets should be included.

It is apparent that considerable care must be taken to designate a beneficiary of one’s assets that can pass outside a Will, and to have a proper Will. It is important to try and avoid conflicts between, or imprecise descriptions, in those instruments so as to ensure that your assets devolve to the person or persons intended.

Daniel J. Dochylo is a partner in the Toronto office of Borden Ladner Gervais LLP. He is also National Chair of the Estate and Family Law Litigation Focus Group.