Designating Beneficiaries under Special Circumstances

14 Jul Designating Beneficiaries under Special Circumstances

If you’re like most people today, your family situation is complicated. More than a quarter of Canadian children live with only one biological or adoptive parent.[1] You may be divorced and even remarried. You may have kids with more than one partner.

In other cases, you may have a complicated relationship with your spouse, or you may not trust your spouse to manage your estate. Maybe you did some estate planning, but it was years ago, before your youngest child was born and before you purchased your cottage.

In cases like these, estate planning takes more time and consideration. When it comes to naming beneficiaries for RRSPs, TFSAs and insurance policies, great care must be taken. There are certainly tax benefits to passing assets directly, but you also want to ensure that the right people inherit.

Minor Beneficiaries and Young Adult Beneficiaries

In most provinces, minors cannot control their own funds – and you may not want your young adult child to be responsible for managing a large sum of money either. It’s best to avoid designating minors or young adults as direct beneficiaries. Instead, the money should be left to the estate, and then the funds can be held in trust until the minor or young adult is more mature (i.e., 25-30 years old).

Disabled Beneficiaries

There are two issues with leaving assets to a person with disabilities. First, a large inheritance may impact the amount of social assistance the person receives. Second, if the person with disabilities also has a mental disability, there may be questions about who should manage the funds. In those cases, it may be best to put the funds in a discretionary trust. Sometimes a trust can be designated as a qualified disability trust, which means the trust is also subject to graduated taxes.

Blended Families

If you leave all your assets to your current spouse, any children from a previous relationship may be left out. It is best for each spouse to structure their estate to leave some assets to the spouse and other specific assets to any children from a previous relationship. If you choose to do this, you will need to consider whether it makes sense to designate your spouse as the direct beneficiary on any assets or whether the estate should be the beneficiary.

Multiple Beneficiaries

It seems like a good idea to name all your children as beneficiaries if you want to ensure fairness and equity. But what if one of your children dies before you? In that case, the remaining children get everything, with no provision for the next generation (i.e., your grandchildren from the deceased child). The tax burden may also not be evenly distributed. In order to keep future generations in mind, it’s best to name the estate as beneficiary and distribute the assets in your will.

Beneficiaries with Creditor Exposure

If one of your beneficiaries is bankrupt – or even simply struggles with financial decisions – it may be best not to name that person as a direct beneficiary. Instead, name the estate as beneficiary and hold the funds in trust for the person. This adds a layer of protection to ensure that creditors won’t be able to claim the money to settle a debt, and it also ensures the person won’t come into a huge amount of money all at once that they won’t be able to manage.

To learn more about preparing your estate, contact us.

[1] https://www12.statcan.gc.ca/census-recensement/2016/as-sa/98-200-x/2016006/98-200-x2016006-eng.cfm

Joel Rose

With over 35 years of experience, Joel Rose helps families – and their businesses – to prepare for the future. He offers guidance and support to help his clients create estate plans and succession plans that meet the needs of the whole family. Through his extensive professional and personal experience, Joel is known for his compassion and his ability to find a creative solution to meet each family’s needs.