Choosing your beneficiary is one of the most important steps in estate planning. Your beneficiaries will receive money and other assets from your estate when you pass away. Without named beneficiaries, the government may decide what happens to your assets, which may be quite different from what you would have wanted.
» MORE: Steps for basic estate planning
What is a beneficiary?
In terms of estate planning, a beneficiary is the person or persons who receives all or a portion of a deceased person’s estate.
You can name one or more beneficiaries in your will as the intended recipients of your money, property and other assets when you die.
You can also name beneficiaries on life insurance policies, registered accounts, such as Registered Retirement Savings Plans (RRSPs) or Tax-Free Savings Accounts (TFSAs), and some other financial products so that those assets go directly to those specific individuals when you pass away.
If you don’t name beneficiaries, your heirs will be determined according to the estate rules of your province or territory, which may not align with your wishes.
In some provinces, if there’s no will clearly naming beneficiaries, the court prioritizes spouses as rightful heirs. In other provinces, your children and your spouse may be forced to divide the estate as equal beneficiaries.
» See Our Picks: Canada’s best high-interest TFSAs
Who can be a beneficiary?
Rules pertaining to 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 and/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 an underaged child as a beneficiary, the assets will not go directly to them but rather 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 for an underaged child’s inheritance in your will, otherwise the court will have to appoint a trustee, which can take time, expense and cause undue stress on remaining family members.
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. (Note that in Quebec, beneficiaries can only be named in wills.)
As mentioned above, this ensures that the asset will go directly to the designated beneficiary without passing through 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 avoid some taxes, and the asset will be transferred to the beneficiary much faster than if you leave it to them 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.
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.
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.
If you do not select a contingent beneficiary, the assets intended for the specified beneficiary will revert back to your estate.
The tax-free withdrawals of a TFSA offer more flexibility, but the tax-deferred contributions of an RRSP are great for retirement. The type of account you choose will depend on your savings goals.