Beneficiary Designations: Why, When and How? Presented by: Martin R. Grimba, BA. FLMI

1. Beneficiary Designations:Why, When and How? Presented by: Martin R. Grimba, BA. FLMI RVP Estate Planning - AEIS

2. Intent of the Designation • To ensure the life insurance proceeds, reach the hands of the intended beneficiary • Defined by Provincial Legislation • Part of the estate planning process • Part of the tax planning process • Policy owner maintains control over receipt of the proceeds • Changing designations not like changing ownership (tax implications)

3. Making a Designation • Designation versus Declaration • Designation made in the application form • Change by beneficiary designation form • Declaration is made subsequent – i.e. will • CAUTION: Subsequent declaration revokes previous designation • Notify carrier if subsequent declaration causes a change in beneficiary

4. Declaration in Will • Declarations in a will are always revocable because a will must be revocable • Special rules with wills • Will revoked, then declaration is revoked • Will and declaration must be in writing • If will invalid, declaration may stand – different formalities • Declaration in will effective from date will is signed

5. Types of Designations • Revocable • Allows policy owner to deal freely with policy and to change designations without consent of the beneficiary • All designations are considered revocable unless expressed “irrevocable”

6. Consideration • Revocation • Must be in writing • Change in beneficiary designation – carrier requires notice • Subsequent designations will revoke original designation

7. Types of Designations • Irrevocable • Must be filed with carrier to give notice • Useful where creditor protection is wanted • Often used to comply with separation agreements or family court orders • Gives certain rights to the beneficiary – consent required • CAUTION: limits what owner can do with the policy • Assign the policy, withdraw funds, transfer ownership, change the policy coverage, cannot change beneficiary without consent • But consent or notice is not require for all transactions – i.e. lapse

8. Considerations • Creditor Protection • Named beneficiary and not estate avoids probate and creditors of the estate • Provincial legislation prevents creditors of owner from seizing contract during lifetime of the insured • “Preferred Class”– designation in favour of spouse, children, grandchildren, parent of the insured – exempt from seizer during lifetime • In Quebec - class is wider, includes ascendants and descendants of owner • Irrevocable beneficiary

9. When Making a Designation • When and where are proceeds needed? • Examples • Loss of key person • Business debt • Fund buy-sell obligations • Replace income • Equalization of estate • Support dependents • Fund bequests (i.e. charitable) • Final expenses, estate costs • Tax liabilities • Direct designation to individual avoids probate

10. What to watch out for whencreating a designation • Providing name of beneficiary easiest way to identify the beneficiary • Designations may be more difficult if generic • “To my spouse” • “To my children” • “To my heirs, assigns, next of kin” • “Per stirpes or per capita”

11. Considerations • Multiple and Contingent Beneficiaries • Be clear as to percentages • Where not specified then share equally – default • If two beneficiaries - one dies, survivor takes all • Where three or more and one dies - pro rata • Always wise to name contingent beneficiary • No contingent beneficiary named then back to owner or owner’s estate

12. Considerations • Family Law Issues • Divorce or separation will not cause designation to be revoked automatically by carrier • Dependent relief claims can partially or completely override a beneficiary designation • Release in separation agreements do not revoke beneficiary designation unless agreement is specified • Separation agreements or court orders may require designation be in favour of ex-spouse • Upon separation, review with client designations, may be inherent conflict of interest where acting for both parties

13. Considerations • Disabled and minor beneficiaries • Where disabled beneficiary – Henson Trust • Discretionary • Avoids termination of government benefits • Minor beneficiary can not be paid proceeds – Guardian of property or Public Trustee • Named trustee avoids payment to minor • Avoid “In Trust For” • Formal document avoids lump sum payout at age of majority • Provides roadmap for trustee – allowed to encroach on capital

14. Considerations • Minor Beneficiary – Can an insurance trust play a role? • Create a “Declaration” • Implementation • By will • By trust document • By hybrid method

15. Considerations • Death of a beneficiary • Contingent or secondary beneficiaries recommended • Proceeds will be divided equally amongst surviving beneficiaries unless stated otherwise • Where no surviving beneficiary – payable to owner or owner’s estate

16. Considerations • Simultaneous death • Where life insured and beneficiary die at the same time • Proceeds paid as if beneficiary predeceased life insured • Life insured is deemed to have survived the beneficiary unless the designation or declaration say otherwise

17. Considerations • Power of Attorney (PoA) • Attorney can not make designation in first instance • Akin to making a will – Testamentary in nature • Not in legislation as a limitation • Discussions on clarifying this issue are occurring • Where irrevocable beneficiary is incompetent • Requirements will vary amongst carriers • May need proof of incapacity • Will in most instances have to provide a copy of the PoA

18. Considerations • Charitable Giving • Proper legal name of charity • Doctrine of Cy-press may apply • Ownership or Designation – different tax outcomes

19. Considerations

20. Considerations • Corporate Beneficiary • Proceeds flow to CDA • CDA credit = proceeds less ACB of policy • Tax-free capital dividend can be paid to shareholders • Drawback – proceeds subject to creditors of the corporation • Holdco may work

21. Considerations • Shareholder benefit • Insurance corporately owned and pays premiums • Shareholder or related party beneficiary • Shareholder benefit issue • Value of benefit – based on life insurance premiums

22. Conclusions • Beneficiary designations not as simple as they may seem • Always be prepared for contingencies and changes in circumstances

23. Support Materials • Manulife • Tax Topics – Beneficiary designations, Creditor protection and insurance trusts • Guides and checklists – Insurance trusts and beneficiary designations