Adult Children and Beneficiary Designations for Estate Planning
Estate planning involves myriad decisions. One set of these is a critical collection of decisions relating to the possibility of naming one’s adult children as beneficiaries or contingent beneficiaries of assets like Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs), and life insurance policies. We sometimes refer to assets like these as “Beneficiary-Designatable Assets” or “BDAs.” They can allow one to name beneficiaries directly at the holding institutions (e.g. banks and insurance companies), facilitating passage of the proceeds to the beneficiaries directly after one’s death instead of passing the assets under one’s will.
While there are potential advantages of naming one’s adult children as BDA beneficiaries or as alternate/contingent beneficiaries (e.g. creditor protection, efficient asset transmission, probate fee avoidance, and insulation from will variation claims by surviving spouses and children), a comprehensive estate plan requires both a broad view and a closer examination of several other essential factors.
Two key considerations are the potential tax implications for one’s estate and the possible consequences of an adult child predeceasing, potentially leaving minor children of their own.
Naming One’s Adult Children as the Beneficiaries or Contingent Beneficiaries of One’s Beneficiary-Designatable Assets (e.g. TFSAs, RRSPs, RRIFs, and Life Insurance)
Pros
Creditor Protection
Designating adult children as beneficiaries of Beneficiary-Designatable Assets can allow these assets to pass outside of one’s estate governed by one’s will. This can help to safeguard the assets from the creditors of one’s estate.
Efficient Asset Transmission
Designating adult children as beneficiaries of BDAs can expedite asset transmission after one’s passing. Beneficiary-Designatable Assets passing outside of one’s will are generally paid to beneficiaries significantly sooner than those passing under one’s will. This can facilitate a more streamlined asset distribution, reducing the executor's administrative burden.
Probate Fee Avoidance
Direct beneficiary designations of BDAs can also sidestep probate fees, potentially resulting in substantial cost savings for the estate.
Will Variation Claim Insulation
Direct beneficiary designations of BDAs may also provide some protection from attempts by one’s surviving spouse(s) and child(ren) to challenge one’s will by allowing at least some of one’s assets to pass outside of the will to the intended beneficiaries.
Cons & Important Considerations
What are the Tax Implications for the Estate and Beneficiaries of the Will?
BDAs passing outside the estate may create tax burdens for the estate passing under one's will. This can diminish or deplete the assets available for beneficiaries of the will. This outcome can undermine one’s overall estate planning goals and lead to unplanned unfairness, emphasizing the need for a balanced approach. Consider the following example.
A will-maker has two adult children and two assets, a one-hundred-thousand-dollar RRSP and a savings account with a little over one hundred thousand dollars. The will-maker goes to the bank and names Child A as the beneficiary of the RRSP. He then goes to the lawyer and signs a will that names Child B as the beneficiary of the residue of his estate. The will-maker does this expecting that, after expenses and probate fees, the residue of his estate will contain approximately one hundred thousand dollars that will be paid to B.
In the will-maker’s mind, A and B will each receive approximately one hundred thousand dollars from him. Unfortunately, the will-maker forgot to account for the tax burden associated with his RRSP upon his death. As a result, Child A may receive the entire one-hundred-thousand-dollar proceeds of the RRSP tax-free, while the taxes related to the RRSP are paid from the will-maker’s estate. This tax burden from the RRSP falling on the estate may result in B receiving significantly less than the will-maker intended. It may cause an unintended disparity between the inheritances received by A and B, respectively. This may only be discovered by B after the will-maker’s death, much to B’s dismay.
What if an Adult Child predeceases and leaves descendants?
Further challenges arise when considering that an adult child might predecease and leave descendants. This can be an essential consideration for people who have grandchildren. Financial institutions often lack flexible options to accommodate providing for the descendants of an unexpectedly predeceased adult child. This contrasts with assets passing under a will. A will can readily accommodate the possibility of an adult child predeceasing. For example, a will might instruct the executor to do the following:
Divide the residue of my estate in equal shares among those of my children who are alive on the date that is thirty days after the date of my death, except if any of my children has died before that date and one or more children of that deceased child of mine are alive on that date, that deceased child of mine will be considered alive for the purposes of the division, and the share created for that deceased child will be divided equally among those children of that deceased child.
What if an Adult Child predeceases and leaves minor children?
The complexity intensifies when adult children might predecease, leaving minor descendants. Minors cannot directly receive inheritances or the proceeds of BDAs, and the absence of a carefully crafted express trust poses challenges. This can be a critical consideration for people with minor grandchildren (or who might become grandparents soon).
If one names one’s adult children as the beneficiaries of assets like RRSPs, TFSAs, and life insurance, and one further wishes to instruct the holding institution(s) that if a child predeceases, they are to pay the predeceased child’s share of the BDAs to the children or descendants of that predeceased child, one must be alert to considerations relevant specifically to minor beneficiaries.
If an express trust has not been carefully established to receive the proceeds of BDAs on behalf of minors directly named as the beneficiaries of such assets, the Public Guardian and Trustee of British Columbia (the “PGT”) may be required to step in to hold the proceeds on behalf of those minor beneficiaries. If this occurs, the PGT can pay itself out of the proceeds on an ongoing basis until the minor beneficiary reaches the age of majority, highlighting the need for careful planning to avoid such intervention.
See our previous article, Estate Planning for Minor Children, for a more detailed discussion of this issue and other important considerations relevant to minor beneficiaries.
What about the Presumption of Resulting Trust?
Presently, in British Columbia, direct beneficiary designations of assets like RRSPs, RRIFs, TFSAs, and life insurance are not a guarantee that the proceeds of such assets will pass outside of one’s will or that the named beneficiaries will be able to keep the proceeds as their own. This may mean the beneficiary cannot keep the proceeds despite the paperwork done at the holding institution naming them as the beneficiary. This is a shocking piece of information to many folks we assist. It is due to the current potential for the courts in British Columbia to apply a legal presumption known as the presumption of resulting trust to the proceeds of Beneficiary-Designatable Assets.
On several occasions in recent history, the Supreme Court of British Columbia has applied the presumption of resulting trust to the proceeds of a Beneficiary-Designatable Asset. The consequences of this include the following possibility. A named beneficiary of a BDA could receive BDA proceeds from a holding institution and be assured by representatives of that institution that the proceeds are theirs to keep. Despite this, the named beneficiary of the BDA may later be obliged by the Supreme Court of British Columbia to surrender the BDA proceeds they received to the executor. The executor could then add the BDA proceeds to the assets passing under the will. The will may direct the estate to people other than the beneficiary. As previously noted, assets passing under the will may also be vulnerable to a will variation claim by a spouse or child.
This series of events could have catastrophic implications for one’s estate planning hopes. Fortunately, such risks can usually be addressed with sound advice and careful attention to robust documentation of one’s intentions.
A fulsome discussion of this issue is beyond the scope of this article, but it is a vital topic and a most troublesome trap for the unwary. We will discuss this in more detail in a future article. Until then, if you are curious, please see Chung v Chung, 2023 BCSC 1778 (CanLII) (read the case here), for an interesting and current example of a situation in which these kinds of considerations are causing significant strife and expense.
Conclusion
As individuals navigate the subtle and intricate landscape of estate planning, the possibility of directly naming beneficiaries of assets like RRSPs and TFSAs demands careful consideration. While the much-vaunted advantages of creditor protection, efficient asset transmission, probate fee avoidance, and will variation claim insulation are clear, a nuanced understanding of several other critical implications is equally vital. It is crucial to balance efficiency and flexibility to minimize the risk of unfortunate unintended outcomes.
By working with qualified professionals to proactively attend to the kinds of considerations addressed in this article, individuals can build a robust foundation for a well-executed estate plan that aligns with their overall goals and reduces the risk of leaving an unintentional legacy of expense, conflict, or outright harm. This can be a challenging process. It requires carefully considering the details of one’s assets, wishes, and goals. It also requires keen attention to one’s family structure and dynamics as well as the relevant legal and tax considerations.
Careful planning like this is always a worthwhile exercise. An ill-conceived estate plan (or, worse, the lack of a plan entirely) can have two primary undesirable outcomes: (1) significant expense, delay, confusion, and prolonged legal conflict for surviving family and beneficiaries, and (2) a few estate litigators get to purchase bigger boats and go on nicer holidays at the expense of your estate and family members.
If you have any questions about estate planning involving assets like RRSPs, RRIFs, TFSAs, life insurance, or any other estate planning or administration matters, we can be reached here.