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October 29, 2010

Beneficiary Designations

by K. Eleanor Wiebe, Q.C.

The common law dealing with wills has evolved with formality. The purpose of the will is to have the wishes of a testator (will maker) relating to the division of property followed after the testator’s death. As the testator is not alive to provide further direction or clarification, formalities as set forth in The Wills Act of Manitoba and other requirements at common law must be met for the will to be valid and the testator’s wishes followed. In broad terms, these formalities and common law requirements include: (1) the testator must have had capacity at the time the will was made, both as to legal age and mental capacity; (2) the testator must have known and approved of the contents of the will; (3) the will must be in due form, i.e. in writing; and (4) the formal requirements of The Wills Act must have been met (an example of a formal requirement is that 2 witnesses must be present at the same time to witness the signature of the testator).

Insurance Designations

Separately and apart from the law of wills, the insurance industry and legislatures have developed rules dealing with insurance proceeds payable on death. Under the provisions of The Insurance Act of Manitoba, an insured may, by declaration, designate a beneficiary or his estate to receive life insurance proceeds. This may be done either in a will or in “a declaration” that is signed by the insured, without other formality.

Insurance products are popular as a means of providing for loved ones on death or ensuring liquidity to allow for equalization among beneficiaries or payment of taxes or other debts. Unlike other assets of the deceased, proceeds of insurance which are payable to a beneficiary do not form part of the estate of the insured and are not subject to the claims of creditors of the insured. Life insurance that is payable to a named beneficiary passes outside the estate and is not governed by the testator’s will. Even if a deceased or his estate is bankrupt, the proceeds of life insurance may pass to the beneficiary without regard to creditors’ claims.

Designations of Retirement Savings and TFSAs

Pension plans and other retirement savings vehicles now form an important part of the financial products market and the savings strategies of Canadians. Early in the twentieth century, the Supreme Court of Canada considered a case where a designation of beneficiary was made for a pension benefit without the formalities of a will. The Court decided that such a designation was “testamentary” in nature and was not valid, as it did not comply with The Wills Act. The result has been that the provinces have passed legislation to allow designations on a more informal basis. In Manitoba, The Beneficiary Designation Act (Retirement, Savings and Other Plans) governs designations made by participants for plans for benefits payable on the death of the participant. For purposes of the Act, a “plan” is defined as:

(a) a pension, retirement, welfare or profit-sharing fund, trust, scheme, contract or arrangement for the benefit of employees or former employees, or agents or former agents of an employer, or the dependants or beneficiaries of any of the foregoing,

(b) a fund, trust, scheme, contract or arrangement for the payment of an annuity for life or for a fixed or variable term, or

(c) a TFSA (tax-free savings account), retirement savings plan or retirement income fund as defined in the Income Tax Act (Canada)…

Accordingly, pension benefits, RRSP and RRIF proceeds and TFSA plans are all governed by that Act for purposes of designations.

The Act allows a designation to be made by will or by an instrument signed by the participant. When made by instrument, the instrument is usually a form at the institution where the plan is maintained and is signed by the participant without witnesses or other formality. When made in a will, the designation must refer to the plan either generally (“all my RRSPs”) or specifically (“my RRSP bearing plan no. 34437 at the Bank of Manitoba”).

The Act allows revocations to be made by instrument or by will. When done by will, a revocation of an instrument is only effective if the revocation relates “expressly to the designation, either generally or specifically”.

Consider the situation if a participant made a designation with the institution on the institution’s form, directing proceeds of the plan, and then later made a will leaving the residue of the estate to others without any mention of the existing designation. This was considered in Ontario in 2007. In that case, a testator made a designation of a RRIF to his 8 children and later made a will with a different distribution of the residue of his estate. The will contained a general revocation clause “revoking all wills and testamentary dispositions of every nature or kind…” but contained no specific mention of the existing designation. The court found that the general wording of the will revoked the RRIF designation made with the institution.

The judge came to this conclusion notwithstanding that the language in the Ontario legislation (similar but not identical to Manitoba) includes a provision that to be an effective revocation in a will of a designation, it must “…relate…expressly to the designation, either generally or specifically.” This now creates a level of uncertainty for an executor appointed under a will if the testator has also made designation by instrument and the will and designation have an inconsistent scheme of distribution. It also creates problems for issuers and administrators of plans – what level of inquiry is needed to pay out proceeds to named beneficiaries? The Act provides that payment by the administrator in accordance with a designation, in the absence of “actual notice of a subsequent designation or subsequent revocation of the designation” is a “full discharge to the administrator”. While the Ontario case is not binding in Manitoba, and thought by most lawyers to be incorrectly decided, it is problematic for an executor in like circumstances.

The general rule is that a will speaks from the date of death, but this rule is modified when dealing with designations of plan proceeds in the will. A designation or revocation made in a will is effective from the date of the will, not death. This means that a general clause in a will leaving “all RRSPs or RRIFs” to a named person is effective as to only those plans in existence at the time the will is executed. If additional RRSPs are subsequently acquired, and the purchaser wishes to have the person originally named in the will as the beneficiary, he should do one of the following: (1) name that same person as beneficiary with the institution on their designation form; (2) re-execute the will or prepare a codicil to have a current date (e.g. after the new RRSP is purchased); or (3) make no designation when the new RRSPs are purchased and assume that if there is no inconsistent designation, the designation in the will may apply to the after acquired RRSP. The most prudent course of action would be to follow option (1) or (2) above.

Income Tax Issues

Aside from the complications as to the form of the designation (instrument or will), there are other issues which may not have been considered by clients in making a designation. For RRSPs and RRIFs, contributions made to these plans are tax deductible in the year of contribution and are taxable on withdrawal. At the time of death, the proceeds will be considered withdrawn and are taxed in the hands of the deceased in the final income tax return, unless they can be transferred on a “rollover” basis to another or used to purchase an annuity. In general terms, to qualify for this treatment the proceeds must be paid into a plan for the spouse or common law partner of the deceased or dependent child or grandchild (dependent both financially and by reason of mental or physical disability), or to purchase an annuity for a minor dependent child or grandchild. The rules are technical and restrictive.

If there is no rollover available, the full amount of the proceeds are taxed in the return of the deceased in the year of death. As the proceeds often have significant value, the rate of tax applicable can be at the highest marginal rate. Administrators of plans who pay out in accordance with a designation on death are not required to withhold tax on the proceeds and will pay out the full amount to the named beneficiaries. The personal representative of the deceased includes the full amount in the final return and pays tax from the assets of the estate, notwithstanding that the proceeds are not paid to the estate. Consider the situation where the deceased has named child A as the beneficiary of a $100,000 RRSP and child B as sole beneficiary of an estate which has a $100,000 bank account. The net effect of this will be that child A will receive the $100,000 RRSP proceeds directly from the plan administrator without any withholding tax and child B will receive the amount in the bank account, less funeral expenses and payment of the deceased debts and liabilities, which will include tax on the RRSP proceeds.

The testator may have thought both child A and B would be treated equally but the plan implemented does not accomplish this. A possible solution would have been to name child A and child B as beneficiaries of the RRSP and both child A and child B as equal beneficiaries of the residue of the estate. This would have established an equal distribution. Caution should always be exercised when the designated beneficiaries of an RRSP or RRIF are not a spouse or common law partner, or when the designated beneficiaries are not the same as the residual beneficiaries under the will.

Probate Fees

In many circumstances, the will of the deceased must be submitted to a superior court by the named executor to “prove” the will. If all is in order a “grant of probate” will subsequently be issued by the court. This procedure involves the court confirming the validity of the will and the formal appointment of the executor. The grant of probate constitutes the legal document whereby the assets of the estate can be dealt with in accordance with the testator’s wishes. Third parties (such as a financial institution or land titles office) asked by an executor to transfer assets of a deceased to named beneficiaries or others entitled at law, often will refuse to do so without being presented with a grant of probate. This ensures that an estate asset is transferred to the person so entitled under the will.

In Manitoba, when a request for probate is made to the Court of Queen’s Bench, the executor must complete an inventory of assets of the deceased and set out the fair market values of those assets at the time of death. Probate fees are paid on the fair market value of the assets, currently at the rate of $7 of fees per $1,000 of value. As only assets owned by the deceased at the time of death are included, assets owned jointly with a right of survivorship and those which pass by a beneficiary designation are not included and no probate fees are paid on these values. Also, real property not located in Manitoba, such as a cottage or vacation condominium, is not subject to probate fees in Manitoba.

Insurance proceeds payable to a named beneficiary, in addition to being free of creditors’ claims, do not form part of the assets of the estate of a deceased and no probate fees are exigible on them. In some circumstances, for planning or other reasons, proceeds of insurance are made payable to the estate, and in these circumstances, the insurance proceeds are included in the inventory of the assets of the deceased and probate fees are paid on them.

As different provinces in Canada have different rates of probate fees (and Ontario and British Columbia have significantly higher fees than Manitoba), much attention has been given by estate planners to assist clients in avoiding probate fees. The simplest of techniques are the designation of a named beneficiary, for insurance or other products (RRIFs, RRSPs, TFSAs and pension benefits) or holding property in joint names with a right of survivorship. For many reasons naming a beneficiary in a policy or product requires careful thought and should not be done without considering more than just the avoidance of probate fees.

Effect of Separation and Divorce

Under The Wills Act, when parties are divorced, a will is read as if the spouse predeceased the testator. This is not the case on separation or before the finalization of the divorce. A will remains in effect during this time period, and accordingly, clients often make new wills upon separation. A spouse has rights on marriage breakdown and on death (as does a common law partner in Manitoba) under a series of provincial statutes, and regardless of the act of making a new will, these rights can be enforced against an estate or “pursued” against assets which may no longer be in the estate, so care needs to be taken when drafting wills prior to divorce. Designations under The Beneficiary Designation Act and The Insurance Act are not affected or revoked by separation or divorce, and must be specifically changed if the “former” spouse or common law partner is named as beneficiary, unless the intent is to have the “former” spouse receive the proceeds.


Beneficiary designations for insurance and for plans covered by The Beneficiary Designation Act are simple, effective tools to deal with transfer of wealth. Being informed as to the possible effects of a designation is critical and careful thought as to their role in an overall estate plan (including the will and any trusts) by the planners is essential. Other than the home, in most circumstances significant wealth of a deceased is held in RRSPs, or RRIFs together with the proceeds of insurance. Appropriate time and care is warranted in ensuring the wishes of the deceased have been properly expressed and can be followed on death with both the will and any instrument designations.