Life insurance can be a powerful estate planning tool, offering unique benefits and strategic advantages. In Ontario, incorporating life insurance into an estate plan can enhance financial security, provide creditor protection, and offer tax benefits. However, while life insurance policies offer unique estate planning advantages, they are not immune to equitable claims. Careful planning is essential to navigate these complexities and maximize the benefits of life insurance in estate planning.
Protection of Life Insurance Proceeds from the Estate and Creditors
Under the Ontario Insurance Act, life insurance proceeds are generally excluded from a deceased’s estate if passing to a designated beneficiary. This allows beneficiaries to receive funds directly and shields them from creditor claims. For instance, section 196 of the Insurance Act stipulates:
Claims by Creditors
196 (1) Where a beneficiary is designated, the insurance money, from the time of the happening of the event upon which the insurance money becomes payable, is not part of the estate of the insured and is not subject to the claims of the creditors of the insured.
Contract Exempt from Seizure
(2) While a designation in favour of a spouse, child, grandchild or parent of a person whose life is insured, or any of them, is in effect, the rights and interests of the insured in insurance money and in the contract are exempt from execution or seizure.
This exclusion is significant. So long as a beneficiary is designated, the Insurance Act ensures that the intended recipient receives proceeds directly, avoiding probate fees and delays associated with estate administration, and safeguarding the funds from creditors claims. This enables a more efficient transfer of wealth.
Designating Beneficiaries Under the Insurance Act
In terms of who can be designated under a policy, section 190 of the Insurance Act stipulates that:
190 (1) Subject to subsection (4), an insured may in a contract or by a declaration designate the insured, the insured’s personal representative or a beneficiary as one to whom or for whose benefit insurance money is to be payable.
(4) Subject to the Authority rules, an insurer may restrict or exclude in a contract the right of an insured to designate persons to whom or for whose benefit insurance money is to be payable.
Furthermore, under section 191(1) of the Insurance Act, an insured can declare a beneficiary irrevocably. This means that, while the beneficiary is alive, the insured cannot alter or revoke the designation without the beneficiary’s consent, providing peace of mind to both the insured and the anticipated beneficiary.
Equitable Limitations
While life insurance designations can be a powerful estate planning tool, they are not immune to equitable claims and must align with common law principles.
In Moore v Sweet, 2018 SCC 52, Michelle and Anthony, former spouses, agreed that Michelle would pay the premiums of Anthony’s life insurance policy, and in return, Anthony would keep Michelle as the sole beneficiary of the policy. Despite this agreement, Anthony later named his new common-law spouse as the irrevocable beneficiary of the policy under section 191(1) of the Insurance Act. Upon Anthony’s death, the proceeds of the life insurance policy went to Anthony’s new spouse, not Michelle.
The majority of the Supreme Court ruled that the proceeds of the life insurance policy should be subject to a constructive trust in favour of Michelle. The court found that Michelle was deprived, while the common law spouse was unjustly enriched. The court also found no juristic reason for the enrichment, despite the new common law spouse being appointed as an irrevocable beneficiary under the policy. The court emphasized that the Insurance Act does not override common law or equitable rights.
This case illustrates that while life insurance is a valuable estate planning tool, it is not immune to equitable remedies like constructive trusts when conflicting with contractual agreements.
Conclusion
In conclusion, life insurance is a versatile and efficient tool in Ontario estate planning. Properly structured beneficiary designations allow proceeds to bypass an insured’s estate and protect funds from creditors, ensuring asset protection and certainty for beneficiaries.
However, as seen in Moore v Sweet, courts may impose equitable remedies like constructive trusts if a third party proves an agreement, reliance, and unjust deprivation. It is crucial to avoid agreements that conflict with beneficiary designations, as they can lead to potential equitable claims.
Thank you for reading!
David Morgan Smith and Emily Adamo (student-at-law)