Omissions can cost you and your client, says tax expert

(October 21, 2003) Sometimes overlooking the slightest detail can carry huge consequences, not only for your client, but for yourself. This is especially true in the designation of beneficiaries for RRSPs and RRIFs, warns Jamie Golombek, vice-president of tax and estate planning at AIM Trimark Investments.

“This is something that we as advisors take for granted,” he told the audience at a recent AIM Trimark educational session in Toronto. “We tell all our clients ‘make sure you name an RRSP or RIF beneficiary for your plan,’ but let’s just make sure we know the consequences if a client doesn’t do that.”

Golombek cited the example of Bramley v. Bramley Estate, a case in which a son was disinherited due to the omission of a beneficiary designation when his father converted his RRSP to a RIF. The father’s RRSP had named the eldest son as sole beneficiary, while his will left the balance of the estate to his younger sons.

When the father died, the omission of a designated beneficiary for the RIF led to the contents being included in the rest of his estate, to which the eldest son had no claim.

Bramley argued that since he had been the beneficiary of the RRSP and there was no expressed wish to disinherit him, it should be assumed that his father wanted him to inherit the funds in the RIF.

“Of course the judge said ‘it doesn’t work that way’ and he lost the case,” says Golombek. “The RIF is a separate contract. By [his father’s] failing to name the beneficiary on the particular RIF, he lost his entire inheritance.”

The next case he cited demonstrated the risk to which an advisor who misses such an omission may be exposed. In Desharnais v. Toronto Dominion Bank, Ms. Desharnais was the designated beneficiary of her common-law husband’s $138,000 RRSP, held at TD Bank. Before undergoing brain surgery, her partner assigned to her power of attorney. After the surgery he lapsed into a coma, surviving for a few years before dying.

While he was in the coma, Desharnais was approached by TD Evergreen, which recommended transferring the RRSP from TD Bank to Evergreen, offering superior financial advice and higher returns.

She took the advice, transferring her common law partner’s RRSP to TD Evergreen. Some time after the transfer, her partner died.

“No one advised her in that transfer that she might want to continue to have herself named as the beneficiary of the RSP,” Golombek says. “Of course there was no beneficiary under this new RSP at TD Evergreen and they paid out to the estate.”

Because they were a common-law couple, she did not have the same survivor rights that a married woman would enjoy. The will left everything to the deceased’s children and she was left with nothing.

“So this time she got smart,” says Golombek. “She sued TD Evergreen for negligence, saying ‘you said you were going to give me all this great advice… yet you forgot to tell me something so basic, that I should carry forward the RSP beneficiary designation?'”

According to the April 2003 Estates and Trusts Newsletter from law firm Fasken Martineau DuMoulin, Desharnais’ power of attorney status would not allow her to name herself as beneficiary anyway — another point that TD Evergreen apparently failed to mention.

Desharnais won the case and the subsequent appeal. TD Evergreen was ordered to pay the $138,000 to the children as well as $138,000 to the widow in damages. This may sound like a drop in the bucket for an institution the size of TD Bank, but if it had been a small, sole proprietor shop the court order would not likely have been any different.

Filed by Steven Lamb, Advisor.ca, slamb@advisor.ca