A new law could bring some much-needed clarity to the rights of substitute decision makers when it comes to an incapable person’s beneficiary designations on things like RRSPs, life insurance policies and Tax-Free Savings Accounts.
Although attorneys for property are granted extraordinary powers under provincial law – they are essentially able to anything the POA grantor could do if they were capable, except for making a will – their authority over beneficiary designations occupies a legal grey area because of a longstanding debate over whether they should be considered “testamentary dispositions” that may be captured as part of the law’s broad definition of what constitutes a “will.”
This ambiguity causes particular problems when a person has a POA in place and their RRSP needs to be converted to a RRIF or their registered plan is switched between banks. Without explicit legislative authorization for the POAs to make fresh beneficiary designations after the transfers, it’s up to individual financial institutions to decide whether they will honour the existing designations.
Earlier this year, Ontario’s provincial government launched a public consultation that outlined its plan to fix these situations by allowing attorneys to make fresh designations in the case of converted, renewed, replaced or transferred accounts, “provided that the beneficiary remains the same as in the designation made in the original instrument by the incapable person while capable.”
There are good reasons to encourage the honouring of a deceased person’s beneficiary designations, rather than dumping any remaining funds into their estate after they die. First of all, by allowing the money to flow straight to the beneficiary, they can avoid the 1.5-per-cent Estate Administration Tax that would otherwise be payable on all assets in the estate over $50,000.
Apart from avoiding an unnecessary levy on their windfall, heirs will also thank you for designating them as beneficiaries because of the time and hassle they will save by staying away from the probate process. It can be a draining experience, since it routinely takes months for executors to get the court’s seal of approval via its overworked estates office, before they can start distributing assets.
Staying on top of your beneficiary designation choices can also help reduce the chance of a legal dispute among heirs and I encourage my clients to revisit them as part of their estate plan reviews every few years, or at least after major life events such as the birth of a child, marriage or divorce, just to make sure the beneficiaries you named first time around still make sense.
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