Estate experts seek resolution on beneficiary designation issue

Estate experts are calling for changes to Ontario legislation to confirm that proceeds from registered plans and insurance policies belong to their designated beneficiaries and are not presumed to be held in trust for the estate.

While the Ontario Superior Court of Justice decision in Mak (Estate) v Mak appeared to reaffirm the primacy of beneficiary designations in Ontario, uncertainty will hang over the estate planning process until a higher court rules on the matter or, ideally, legislative amendments are made, said Kevin Wark, tax advisor to the Conference for Advanced Life Underwriting (CALU).

“The legislative approach is the most efficient, effective way to deal with this,” Wark said. He characterized the Mak (Estate) decision as “helpful, but not determinative” of the beneficiary designation question.

Sanjana Bhatia, director of tax and insurance planning with Sun Life Financial in Waterloo, Ont., agreed. “It’s really important for us to have legislation to prevent the possibility of a future court finding that a resulting trust applies to a beneficiary designation.”

In Mak (Estate), released in June, the plaintiffs unsuccessfully sought an order to set aside the beneficiary designation of a RRIF. In making their argument, the plaintiffs relied on Calmusky v Calmusky, which found that the principle established under the 2007 Supreme Court of Canada decision Pecore v Pecore — that a transfer of property for no consideration to an adult child is presumed to be a trust, unless that presumption can be rebutted by the named beneficiary — applied to a RRIF designation.

However, Justice M. McKelvey in the Mak (Estate) decision found the presumption of a resulting trust did not apply to a beneficiary designation of the RRIF, noting that the Calmusky decision had been “the subject of some critical comment” from estate practitioners.

Instead, the court found in Mak (Estate) that a beneficiary designation represents a gift that takes effect upon death, while the presumption in Pecore applied to gifts made during a lifetime. In addition, the court noted that Ontario’s Succession Law Reform Act (SLRA), which governs estate distribution, expressly permits a designated beneficiary to be named on a plan. Finally, the court found that the “whole point” of a beneficiary designation is to “specifically state what is to happen to an asset upon death.”

Estate lawyers welcomed the decision.

Justice McKelvey “applied the law relating to presumptions of resulting trust in a manner more consistent with traditional approaches that have followed Pecore v Pecore since 2007,” said Suzana Popovic-Montag, estate lawyer and managing partner with Hull & Hull LLP in Toronto, in emailed comments to Investment Executive (IE).

“Mak (Estate) allows for more certainty and predictability with clients’ estate planning,” said Bhatia, who pointed out that gifts made by beneficiary designation typically fall outside of an estate and therefore are not subject to probate fees. “Mak (Estate) is consistent with the provisions of the SLRA and the Insurance Act that say that a policyowner’s intention is not a requirement before paying out the funds under a beneficiary designation.”

However, since the Mak (Estate) and Calmusky decisions were both issued from the same court, “both interpretations are currently out there as law,” Popovic-Montag wrote.

Following the Calmusky decision, CALU and Advocis sent a joint letter to the Ontario Ministry of Finance in September 2020 asking for legislative amendments to provide that the presumption of a resulting trust does not apply to beneficiary designations.

“This would provide greater certainty to testators, beneficiaries and their advisors, help avoid costly litigation, and protect the existing estate plans of a significant number of Ontarians,” the associations argued.

The Canadian Life and Health Insurance Association, the Ontario Bar Association and STEP Canada sent similar letters to the provincial government in response to the Calmusky decision.

In an email, the Ministry of Finance told IE that it was still in the process of reviewing the stakeholder proposals.

Wark said Mak (Estate) may provide an opportunity for CALU, as well as other interested parties, to revisit the issue with the government.

“It’s a development that gives credence to the arguments we were making,” Wark said. “I think the stakeholders need to regroup and press forward to request a legislative change.”

In an emailed response to questions from IE, Advocis indicated that it supports the approach taken by the court in Mak (Estate) and would like to see a “final resolution” to clear the uncertainty created by the two conflicting decisions, whether through legislation or a binding decision from a higher court.

“What’s important is that this issue be settled in a way that accords with longstanding consumer expectations regarding how their beneficiary designations will be interpreted,” Advocis stated.

For CALU, achieving legislative change in Ontario could represent a first step to seeking similar amendments in other provinces, Wark said. In recent years, courts in British Columbia, Alberta and Manitoba have also applied the principle in Pecore to beneficiary designations.

“It’s a national problem, not just an Ontario problem,” Wark said.

In light of the continuing uncertainty regarding beneficiary designations, clients should document their intentions in terms of beneficiary designations and joint accounts, particularly in cases where assets are gifted to adult children, estate experts said.

“In the absence of such evidence, there is at least some risk that a legal presumption might otherwise apply, regardless of the client’s wishes and what may appear to be a clear estate plan,” Popovic-Montag wrote.

With files from Melissa Shin