Designation of Beneficiaries under the Insurance Act
This week on Hull on Estates, David and Nadia discuss issues that arise surrounding the designation of beneficiaries under the Insurance Act and how they interact with provisions in testamentary documents.
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David M. Smith – Click here for more information on David Smith.
Nadia M. Harasymowycz – Click here for more information on Nadia Harasymowyc.
Nadia Harasymowycz: Hello and welcome to Hull on Estates. You’re listening to episode 221 on Tuesday, September 7th, 2010.
Welcome to Hull on Estates, a series of podcasts for the Canadian legal community dealing with issues and insights surrounding estate planning in Canada. Hosted by the lawyers of Hull & Hull, the podcast will touch on some key considerations when planning estates and wills. Now, here are today’s hosts.
David Smith: Hi. I’m David Smith.
Nadia Harasymowycz: And I’m Nadia Harasymowycz.
David Smith: If you want to be heard on Hull on Estates, you can participate by leaving us a comment. Email us at email@example.com or you can visit our blog at estatelaw.hullandhull.com.
Good afternoon, Nadia.
Nadia Harasymowycz: Hi David. How are you?
David Smith: I’m well. We talked about what we would podcast on today and what we’re gonna approach or how we’re gonna approach this today is consider the issues that arise when beneficiary designations come into conflict, if you will, with the terms of a Will. And there’s some law that we’re gonna talk about in particular. But in the general sense, I wanted to start first of all Nadia by exploring this idea of how you designate beneficiaries in the first place. And what are examples of financial instruments where you can designate a beneficiary rather than have to name someone in a Will?
Nadia Harasymowycz: Well the one is going to be taking issue in the cases we’re discussing is an insurance policy, which is a large instrument that you could designate somebody as the beneficiary of which means in theory it would not pass outside of your estate.
David Smith: Or would pass out.
Nadia Harasymowycz: Would pass outside the estate.
David Smith: Right. I guess it would depend on the circumstances and a Registered Retirement Savings Plan is another example of a financial instrument which can pass outside of the estate by way of designated beneficiary. Of course, joint accounts are another example or another estate planning tool where you can pass the assets outside of the estate, although there’s different law that applies to those. So when we talk about beneficiary designations under the Insurance Act there’s two governing pieces of legislation. There’s the Insurance Act in Ontario and there’s also Part III of the Succession Law Reform Act. And basically what those Acts say is that you can designate a beneficiary by an instrument and it can be either the insurance policy itself, or you can designate a beneficiary within the body of the Will. And the cases we’re gonna talk about, I guess Nadia, are ones where lawyers in a sense try to create a beneficiary designation in a Will but at the same time circumvent the terms of the Will, right?
Nadia Harasymowycz: That’s essentially what happened, yeah.
David Smith: So we’ll talk about that in some more detail. Certainly under Part III of the Succession Law Reform Act it’s clear that a participant in a plan which could include an insurance policy can designate a person to receive a benefit, either by an instrument signed by him or her or by Will and can revoke the designation by either of these methods. And certainly, Nadia, we’ve seen an awful lot of discussion among the estate planning Bar about the benefits of trying to avoid probate tax, haven’t we?
Nadia Harasymowycz: Certainly. I think that’s a concern for individuals out there also who may be listening to this as to how to go about their planning and potential options for them when they go to take care of that.
David Smith: And certainly in the context of estate litigation, Nadia, we’ve seen more than once a situation where the best efforts made to avoid what’s properly called in Ontario estate administration tax in fact creates significant confusion and can give rise to estate litigation, can’t it?
Nadia Harasymowycz: Absolutely. And in hopefully the two cases that we’re gonna discuss today shed some light on maybe how we can go about estate planning to ensure that any taxes that are paid are properly paid and don’t result in litigation.
David Smith: Right. And I think what also comes out of this discussion is while certainly there’s more and more people who are drawing their own Wills through Will kits available on-line or otherwise, it’s a tricky area of law, isn’t it, where you try to designate beneficiaries within the terms of a Will and quite often the insurance company or the holder of an RRSP may need to be convinced that the Will will be the governing instrument rather than the instrument on file with either the insurance company or the bank as the case may be.
Nadia Harasymowycz: Absolutely. And in fact that’s how the Taylor case got to the Queen’s Bench of Saskatchewan. The insurance company was conflicted as to who the actual beneficiary was and paid the monies into Court and let the parties fight it.
David Smith: Right. And we’ve seen that time and time again where rather than risk exposure from a claimant against the proceeds, the insurance company will pay the money into Court rather than pay out if there’s any confusion whatsoever as to what is the governing designation. So rather than leaving our listeners in suspense for too long why don’t we get right into the cases. They’re both Saskatchewan cases which is kind of rare, isn’t it? I mean, generally when we talk about cases that we consider in Ontario, we’re largely restricted to Ontario cases. Occasionally Court of Appeal cases in other jurisdictions or, of course, cases from the Supreme Court or Canada, but as I understand it, both Carlisle and Taylor are not even Appellate level cases, are they?
Nadia Harasymowycz: No, they’re Court of Queen’s Bench cases in Saskatchewan.
David Smith: And how are these cases of assistance to practitioners and lay persons in Ontario?
Nadia Harasymowycz: Well fortunately the Acts that were considered by the Court in both of these cases, the Estates Administration Act in Saskatchewan and their version of the Insurance Act which is the Saskatchewan Insurance Act are largely similar to the pieces of legislation that are governing in Ontario, which helps us in that the decisions would likely be interpreted in a similar manner in Ontario.
David Smith: Right. And in point of fact, we’ve attended a couple of CLA presentations where pretty respected practitioners have come to the conclusion that while Saskatchewan law does not obviously govern in Ontario, the issues that arise in these cases are of great assistance to practitioners in terms of how to properly draft Wills to comply with the legislation, right?
Nadia Harasymowycz: Absolutely.
David Smith: So in a nutshell, what was the issue in Carlisle?
Nadia Harasymowycz: In Carlisle the deceased had three insurance policies, two of which were made before the deceased made her Will, and the last one was made or obtained after the making of the Will. And the insurance policies named a beneficiary who also happened to be the estate trustee according to the Will and the Will was drafted in a manner that created what is essentially termed insurance trust. So the funds from the insurance policy were to be put into this insurance trust that would be distributed in accordance with the clause in the Will that provided for certain beneficiaries.
David Smith: Right. And that’s, I guess, that’s really the sensitive area here, isn’t it because the beneficiary of the…it would seem to be that any time the beneficiary of a policy is wearing two hats, either as an estate trustee or in this case, as an insurance trustee, the issue is, you know, have you crossed the line in the sense that by receiving the funds in your capacity as an estate trustee, can you really be said to be holding them outside of the estate? Is that kind of the issue?
Nadia Harasymowycz: That’s kind of the issue and essentially in this case is the insurance designation to the estate trustee as an individual or is it to them in their capacity as a trustee? And the directions in the Will specifically require a distribution according to the terms of the Will.
David Smith: And so because of that, the designation was, to use my word, tainted if you will, such that it had to fall into the estate in the eyes of the Court?
Nadia Harasymowycz: Absolutely. That was the end decision.
David Smith: Right. And what was interesting from my reading of the case was the lawyer who drafted the Will in question had actually stated the following: “It is my express intention”…and this is in the clause that dealt with designation…the testator stated “it is my express intention that such insurance proceeds not pass through my Will or estate and this paragraph shall be a declaration within the meaning of the Saskatchewan Insurance Act”. When I read that, Nadia, I thought wow that looks like a pretty clear statement of intent. But it didn’t work in this case, did it?
Nadia Harasymowycz: No. The Court specifically looked at the naming of the beneficiary as estate trustee and as beneficiary on the life insurance policy and essentially went on to say that the designation couldn’t possibly work in the manner that the Will wanted it to.
David Smith: Right. So…and what does Taylor tell us or what kind of gloss does Taylor puts on its law?
Nadia Harasymowycz: Taylor surprisingly found that funds in a similar situation did not form part of the estate. But it went on to distinguish from Carlisle in another case which is Re Brown Estate that a similar situation was found and said that in both Carlisle and Brown as distinct from Taylor, the provisions for the insurance proceeds directed that it be paid or payable to the insurance executor and that wasn’t a named beneficiary; whereas in Taylor the insurance trust that was created specifically named beneficiaries of the insurance document. And so even though an individual which was the executor held those funds in trust, the executor was not the beneficiary.
David Smith: Yeah. Interesting. I mean, a very fine distinction there.
Nadia Harasymowycz: Absolutely.
David Smith: Yeah. So certainly it highlights for any lawyer listening to the podcast that there’s some real subtleties here to drafting that have to be carefully considered. And it’s fair to assume that sooner or later this issue may be put before a Court in Ontario. And, of course, every case is dealt with on the facts of each specific case and on the wording of each specific Will. But clearly one has to be very careful when drafting Wills if the intention is to avoid estate administration tax. Although I’ve got to say, and this is more of an opinion on my part, I’m always somewhat surprised at the efforts to which clients wish to go to avoid estate administration tax in modest estates, because it’s really just not that much tax, is it?
Nadia Harasymowycz: It’s actually not significant in Ontario.
David Smith: No. I mean, it can be if you’ve got a very large estate. But certainly…and we’ve seen this and this, you know, goes back to what we were saying at the beginning…the legal fees associated with a litigation arising out of efforts to avoid estate administration tax will more than offset any savings that would have been achieved trying to avoid the estate administration tax in the first place.
Nadia Harasymowycz: It certainly seems to be so in these two cases.
David Smith: Yeah. Okay, well look that was great. It was very interesting talking about this. I know that you and I have both made note of the fact that the Estates and Trusts section of the Ontario Bar Association has a program this fall where one of the speakers is gonna deal with this in some more detail, so we’ll have to look out for that.
Nadia Harasymowycz: Excellent. Well it was a pleasure doing this podcast with you today, David. And I look forward to podcasting with you again soon.
David Smith: And we look forward to hearing from our listeners. You can send us an email at firstname.lastname@example.org. Be sure to visit our blog again at estatelaw.hullandhull.com. That is a blog that is run with daily entries where we try to have as much information and discussion on various aspects of today’s practice of estate law. We hope that you enjoyed the show. I’m David Smith.
Nadia Harasymowycz: And I’m Nadia Harasymowycz. Until next week.
David Smith: See you.
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