This blog was written by Karen Crellin, Estate and Trust Advisor at MD Private Trust Company which is part of Scotia Wealth Management
*Note: This post was written by a Saskatchewan planner with a focus on common law. It is important to seek guidance in your own province to ensure your plan works there.*
Most people know about beneficiary designations.
The investment vehicles under which beneficiaries can be designated include registered accounts and life insurance policies. Account holders and Policyholders are typically encouraged to designate a beneficiary for these accounts or policies.
Previous blog posts have contained information on changing beneficiary designations, pitfalls of designating beneficiaries, and designating successors. This blog post is about what happens when a beneficiary designation is made but the beneficiary predeceases the person who made the designation.
Scenario 1 – RRSP
Let’s start with a simple scenario. You have an RRSP, and you have designated your spouse as the sole beneficiary of that RRSP upon your death. However, your spouse passes away before you do, and you subsequently pass away without having updated your RRSP beneficiary designation. In this scenario, your RRSP would form part of your estate and would be distributed according to the provisions of your Last Will and Testament or under local intestacy laws if you don’t have a Will in place.
Scenario 2 – RRSP
Let’s change that scenario a bit. Let’s say you have an RRSP with your spouse as the designated beneficiary, but you have also named your three children as contingent beneficiaries of the RRSP. Again, your spouse dies first, followed by you. In this case, your RRSP would be divided among your children as the contingent beneficiaries.
Scenario 3 – RRSP
Now let’s now make one more change to that scenario. Just like above, your spouse is the beneficiary of your RRSP, and your three children are designated contingent beneficiaries. Your spouse passes first, followed by one of your three children. Then you pass away. How are the proceeds of the RRSP distributed then? Your spouse has passed and therefore cannot receive the proceeds of the RRSP as primary beneficiary, which leaves the contingent beneficiaries. But one of those contingent beneficiaries is also gone. The treatment of your deceased child’s portion of your RRSP proceeds will depend on your financial institution’s rules. With some financial institutions, the deceased child’s share of the RRSP would be divided among your two surviving children. With other financial institutions, the deceased child’s share of the RRSP would form part of your estate and be distributed according to your Will or intestacy laws if you don’t have a Will.
The above scenarios dealt with an RRSP. Now let’s talk about life insurance. The rules for what happens with a life insurance policy when a beneficiary predeceases the insured are addressed in the relevant provincial legislation. In Saskatchewan, for example, that legislation is The Insurance Act, S.S. 2015, c. I-9.11. Section 8-125 of that piece of legislation states that if a life insurance policy beneficiary dies before the insured and there is no other distribution method stated in the life insurance contract or the beneficiary designation document, then the deceased beneficiary’s share of the insurance money is payable as follows:
- First, to the surviving designated beneficiary (if there is only one);
- Next, if there is more than one surviving beneficiary, to each of the surviving beneficiaries in equal shares; and
- Finally, if there are no surviving beneficiaries at all, to the insured’s estate.
In my experience, many clients think that if a beneficiary of a registered account or a life insurance policy predeceases them, that deceased beneficiary’s portion of the account or policy would go to that deceased beneficiary’s children. That is not the case. Note that, with any distribution method set out above, the children of a deceased beneficiary are not automatically considered. To put that in context, if that deceased beneficiary was your child, then your grandchildren might not receive the proceeds of those accounts or policies, even if that was your intention.
When designating beneficiaries on any account or policy, it’s important to have a thorough understanding of not only who you have designated but also what would happen if any beneficiary should die before you.