What Is a Beneficiary and How Do You Choose One?
A beneficiary is a person or organization that receives some or all your assets after you pass away. You can name a single beneficiary, multiple people, or even a charity, depending on how you want your estate handled.
Choosing your beneficiary is one of the most important steps in estate planning, ensuring your money and property go exactly where you want them to. In Canada, you can name beneficiaries in your will, or directly on life insurance policies, registered accounts, such as Registered Retirement Savings Plans (RRSPs) or Tax-Free Savings Accounts (TFSAs), and some other financial products.
If you don’t name beneficiaries, your heirs will be determined by your province or territory’s estate laws, which may not reflect your wishes.
For example, in some provinces, the court prioritizes spouses as heirs, while others require the estate to be divided equally between your children and spouse.
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Who can be a beneficiary?
Rules for beneficiaries vary depending on the province where you live, as some regions have estate laws stipulating that you leave at least some assets to dependent children or a spouse. In general, you can name any beneficiary (or beneficiaries) you like, such as family, friends or even a charity.
In Canada, if you name a minor child as a beneficiary, the assets do not go directly to them — rather, they must be kept in trust until the child reaches the age of majority in their province or territory.
It’s vital to name a trustee in your will for a minor child’s inheritance, otherwise the court will appoint a trustee, which can take time and money, and cause additional stress for family members.
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Types of beneficiaries
The two types of beneficiaries most commonly used with financial products, such as registered plans or life insurance, are revocable and irrevocable.
A revocable beneficiary means you can change your beneficiary at your discretion.
An irrevocable beneficiary cannot be changed without written permission from the beneficiary. An irrevocable beneficiary is rare but may be used as part of a separation or divorce settlement.
How to name a beneficiary
In most of Canada, you can designate a beneficiary for insurance policies, annuities, registered pension plans, and registered accounts like an RRSP, TFSA or Registered Retirement Income Fund (RRIF) when you open the policy or account. You can change your beneficiary by contacting the insurance provider or financial institution. (Note that in Quebec, beneficiaries can be named only in wills.)
As mentioned above, this ensures that the asset will go directly to the designated beneficiary and bypass your estate. If you don’t name a beneficiary, those assets will go to your estate and be divided according to the details outlined in your will.
By designating a beneficiary for the policies and accounts mentioned above, you may be able to expedite the transfer and avoid some estate administration taxes, compared with leaving the asset to your estate via your will.
For your other assets and property, designating beneficiaries within your will is typically sufficient.
If you have any questions about how to name a beneficiary or the tax implications of different beneficiary strategies, consult a licensed accountant or estate lawyer.
Frequently asked questions
Can I change my beneficiary?
Can I change my beneficiary?
If you want to update a beneficiary on a bank or investment account, insurance policy, or pension, speak to your insurance provider or financial institution directly. If you try to change the beneficiary of a financial product simply by noting it in your will, the original beneficiary could contest the change.
If you want to change a beneficiary in your will, you can use something called a codicil, which is used to make a small change to an existing will. If you want to make major changes to your beneficiaries, it’s usually advisable to rewrite your will entirely.
In Quebec, beneficiaries can be named only in wills.
What is a contingent beneficiary?
What is a contingent beneficiary?
A contingent beneficiary (also known as an alternate or secondary beneficiary) is someone who will inherit your designated assets if the first beneficiary you name is deceased. Contingent beneficiaries are sometimes used for insurance policies or registered accounts.
What happens if my beneficiary dies before me?
What happens if my beneficiary dies before me?
If you do not select a contingent beneficiary, the assets intended for the specified beneficiary will revert back to your estate. Provincial succession law then dictates how the estate is distributed.
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