Effective planning includes updating beneficiary designations

Staying alert to clients’ changing circumstances and addressing them in clients’ financial plans is essential to avoid negative outcomes. That theme was reinforced this week at FP Canada’s virtual ethics session, part of the certification body’s annual conference.

One issue highlighted was keeping beneficiary designations — for assets such as insurance policies, registered accounts and pensions — up to date after separation or divorce.

In a hypothetical case study presented at the session, a financial planner didn’t contact her clients when she learned they were separating because she was uncomfortable. As a result, the couple’s joint plan wasn’t updated and beneficiary designations weren’t reviewed.

Avoiding such an important conversation “was a failure to act professionally and was a disservice to clients,” said session host Damienne Lebrun-Reid, executive director of standards and certification, and head of the FP Canada Standards Council.

Except in Quebec, “separation or divorce does not affect designated beneficiary status,” said panellist Kristine Anderson, partner with Bales Beall LLP in Toronto. An asset’s designated beneficiary would need to be changed if a client no longer wants their ex-spouse to receive the asset.

In the case study, the planner’s lack of review meant she didn’t know about the couple’s separation agreement, which required that the spousal beneficiary designation on an insurance policy be maintained as part of a support obligation.

As a result, the planner wrongly helped the policyholder — the husband — change the beneficiary designation when he so requested.

Problems can also arise if you don’t know about your client’s beneficiary designation in a will versus on a designated beneficiary form with a financial institution.

“It is the last designation that will govern,” Anderson said.

However, if an insurer, for example, isn’t notified about a more recent beneficiary designation in a will, the insurer would pay policy proceeds to the person named on the institutional beneficiary form.

As such, “best practice is always for communication,” Anderson said. She suggested planners expressly ask clients whether designated beneficiaries are named both in wills and with institutions.

The difference can be particularly important when a minor child is the designated beneficiary, she added, because institutional beneficiary forms often lack provisions to establish a trust for the child’s benefit. As a result, the funds are typically paid into court and not easily available to the child.

That headache can be avoided by making the designation in a will along with trust provisions, including how trust funds are to be spent for the minor’s benefit, she said.

Panellist Paul Thorne, director of advanced planning with Sun Life, referenced a B.C. Supreme Court case involving the failure to update the designated beneficiary on a life insurance policy following a separation — one that occurred decades ago.

The judge commented that the insurer would do well to update its records and remind long-standing policyholders of their designated beneficiaries so that disputes are avoided.

The comment “sends a clear message” about updates that planners should heed, Thorne said.

While planners may want to avoid being stuck in the middle of legal issues, avoidance only exacerbates client situations. To reduce risk, “ask more probing questions,” he said, to get to the root cause of the client’s problem or behaviour.

Further, “it’s much easier to spot changes if you’ve asked questions in the past to establish a client’s pattern of behaviour,” he said.

Thorne’s other suggestions were establishing a process for detailed note-taking, dealing with red flags in a timely manner, and leveraging your firm’s compliance and legal departments or other professional contacts.