Regular Reviews Are Critical to Ensure Designations Match Your Intensions
In my regular readings I came across an article on beneficiaries from Raymond
James Financial Planning. Financial planning ties together your estate, insurance,
portfolio management, tax deferral and looks at family or business cash flows on
an after tax basis taking into account economic and personal family
circumstances. Many medical clients invariably come across these situations in
discussions with their patients or in their own families.
Have you checked your beneficiary designations recently? If not, you may find
that your designated beneficiary is not who or what you think it should be,
especially if you have divorced, remarried or had children since your last review.
While many of us ensure that important documents such as wills are updated on
a frequent basis, we tend to neglect our registered accounts and life insurance
Outdated Beneficiary Designations It seems that every couple of years a court
decision is released that serves to remind us of the importance of regularly
reviewing beneficiary designations to ensure they properly reflect our wishes.
There have been numerous cases of individuals who have divorced and remarried
but who have neglected to update their beneficiary designations accordingly. This
can be quite frustrating for their survivors who must battle in court for a legal
determination of the true beneficiary. The court’s decision, however, may not
necessarily be what the deceased would have wanted, as was the case in the
recent Ferguson, Estate Trustee v. Mew decision in the Ontario Supreme Court.
Simultaneous Death Few people expect to die at the same time as their spouse
and they name each other as their designated beneficiaries. In the case of
simultaneous death, a determination needs to be made about which spouse died
first, even though both deaths occurred at the same time. This determination may
be critical, especially if there are children from a previous marriage: will all the
children be included? Or will children from a previous marriage be excluded?
Proper documentation designating contingent beneficiaries for normal and
extenuating circumstances will ensure that registered assets and insurance
proceeds are directed towards your intended beneficiaries. A similar dilemma
arises if children are named as beneficiaries but documentation has not been
updated to include those who were born after the initial designation. Another
common occurrence is for a parent to make a beneficiary designation for a minor
that simply uses the words “In Trust For” on the application. This could mean no
formal written trust agreement exists or that an agreement does exist but is not
cited in the designation. These types of designations have implications that are
often not thought of at the time of making the designation. In Quebec they may
not even be valid.
DID YOU KNOW? When you pass away owning a registered plan (RRSP, RRIF, LIF,
or LRIF), a tax bill is triggered when a beneficiary is named who is not your
spouse. The beneficiary of your plan will receive the registered assets in full
without any tax being deducted and remitted to the Canada Revenue Agency. So,
how is the tax bill paid? The taxes will be paid out of the remaining assets of your
WHY BENEFICIARY DESIGNATIONS ARE IMPORTANT
The main benefit of naming a beneficiary for a registered account or life insurance
policy is that it allows the money to go straight into the beneficiary’s hands rather
than having to go through your estate - thus eliminating the need for probate. This
allows your beneficiary (or beneficiaries) to avoid potential probate fees and
unnecessary expenses. Without a proper beneficiary designation, upon your death,
the proceeds from a registered account or life insurance policy become part of your
estate, which is subject to probate fees and other expenses. This in turn may
decrease the amount of money your beneficiaries will receive. Another negative
aspect of not appointing a beneficiary is the probate process, which can take
several months to complete, effectively leaving your beneficiaries and loved ones
to fend for themselves until probate is completed. Life insurance can provide the
means to prevent this from happening, and these unfortunate circumstances can be
avoided by simply designating a beneficiary
One of the disadvantages of an “In Trust For” arrangement is the inability to
encroach on capital by the trustee for the benefit of the minor, which could leave
the minor at risk. To prevent these situations, it is crucial that you conduct a
regular review of your beneficiary designations with a professional advisor or
even immediately after you experience a change in family status to ensure they
reflect your intentions.
On a separate note….
From client experience, I note that some doctors may have ample opportunity to
defer more tax with good financial structure in either an operating or a holding
company. IF you are not incorporated we may be able to show you what other
medical professionals have done to defer more tax. A medical professional with
$3 million in assets recently deferred about 15% more in tax with a holding
company structure. Upon analyzing his family situation, a certain reserve of a
specified insurance policy was used and a bank loan was created to take capital
“out” of his holding company. If you would like to learn the reasons why this
process occurred and determine if a similar process may assist your tax situation,
just call me at 416-493-8786 at my Raymond James office.
With the same client above, a balance sheet analysis on his individual stocks
revealed the true risk profile of his portfolio, which was much higher than what
this new client was thinking. Appropriate steps were taken to align his capital
with his estate and family cash flow requirements on a tax efficient basis. If you
wish a second opinion on the purpose, reason, and benefit of any securities in
your portfolio just call my office anytime.
In light of good portfolio process, I will hold a workshop for professionals on the
state of the credit markets, where to look for the best income on your
investments, and show you how the risk of credit in the bond markets may affect
your money. Call me for more details since this workshop will be held in mid
January. It’s a great opportunity to learn professional portfolio management and
network with fellow professionals.
Seasons Greetings and I hope you have a safe family holiday period.
This newsletter has been prepared by Michael Korman B.Comm, FMA, FCSI and Raymond James Financial Planning
Ltd. (RJFP). This newsletter expresses opinions not necessarily those of RJFP. Statistics and factual data and other
information in this newsletter are from sources Raymond James Ltd. (RJ) believes to be reliable but their accuracy
cannot be guaranteed. This newsletter is furnished on the basis and understanding that RJFP/RJ is to be under no
liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or
solicitation for the sale or purchase of any product. Securities-related products and services are offered through
Raymond James Ltd., member CIPF. Financial planning and insurance products and services are offered through
Raymond James Financial Planning Ltd., which is not a member CIPF. Printed in Canada. Reproduction without
permission is permitted with due acknowledgment