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Beneficiary Designations – Problems and Pitfalls of Using Financial Institutions’ Standard Forms

The case of Kilitzoglou v. Cure highlights the confusion and difficulty sometimes caused when an issuer of a life insurance policy or retirement plan requires a beneficiary designation to conform to its standard form and rules. In that case, the deceased filed a change of beneficiary designation form with Trans-America which was rejected on the basis that it did not precisely set out each beneficiary’s entitlement on a percentage basis.

The designation in this case provided as follows: to “CIBC as there (sic) interest may appear and to [my daughter]”. Based on the facts, CIBC’s interest was the outstanding amount of a loan to the deceased. A revised designation form was never sent to Trans-America and the designation form was never returned. 

On the death of the deceased, there was confusion as to whether the designation was valid under the Insurance Act and, if it were valid, whether the deceased’s failure to re-submit a new designation evidenced his intention to leave the beneficiaries as originally designated when he obtained the policy.

The court held that the designation was valid as it complied with the requirements under the Insurance Act. The court also held that the deceased’s failure to resubmit a new designation form did not evidence an intention to leave the beneficiaries as originally designated.

Under the Insurance Act, the only requirement for a valid designation is that it must be in writing. While not explicitly required under the Insurance Act, the designation must also identify the beneficiaries and their entitlements with sufficient clarity. In this regard, it appears that the court was of the view that CIBC’s entitlement was sufficiently expressed. If a designation fails to comply with these requirements, the proceeds will be paid to the deceased’s estate. Consequently, they will be subject to Estate Administration Tax (probate tax) and claims of the deceased’s creditors.

As evidenced by Kilitzoglou, an issuer’s refusal to accept a valid designation can result in seemingly unnecessary, and costly, litigation. It may also result in a new designation that does not reflect the individual’s wishes, which could adversely impact other aspects of the estate plan. For these reasons and given that a significant portion of personal wealth is often invested in retirement plans and insurance policies, it would be of great service to their clients if issuers re-examined their current practices and considered revising their standard forms to provide more flexibility.

With regard to designation forms, individuals should be able to do the following, at a minimum:

  • Designate multiple beneficiaries and multiple contingent beneficiaries;
  • Designate trustees of a particular trust as the beneficiaries, which is often desirable for U.S. residents who have settled
    inter vivos trusts for probate planning purposes;
  • Specify upon which death or deaths a contingent designation is contingent (
    e.g., if a beneficiary predeceases the deceased, his or her share of the proceeds passes to his or her children, as opposed to being split equally among the other designated beneficiaries);
  • Designate a person to hold the proceeds in trust for a minor until a specified age; and
  • Specify the exact entitlement of each beneficiary, either as a fixed sum or percentage.

As an alternative, beneficiaries of insurance policies and retirement plans are frequently designated using a will as the written instrument in which to make a designation. Designations by will can be drafted in an extremely flexible manner and allow for the utilization of additional planning opportunities, such as the establishment of a comprehensive trust to hold proceeds and the ability to use proceeds to fund legacies and pay expenses and liabilities, where appropriate. If properly drafted, designations by will should also avoid probate tax and claims of the deceased’s creditors.

Given the often substantial portion of one’s net worth that passes using beneficiary designations, it is critical to ensure that beneficiary designations are frequently reviewed and updated and are consistent with one’s estate planning objections.

Join us in the New Year for our next blog post on discretionary trust interests and matrimonial planning.

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. In particular, they are not intended to provide U.S. legal or tax advice. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.