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Beneficiary Designations on Separation and Divorce: Your Ex May Take More than the Couch

When major life events occur, it is important to consider your estate planning and what updates and changes must be done. In no circumstances is this more true than when a person gets married, separated or divorced. Each of these life events affects a person’s estate plan in different ways. Failure to properly update your Will and other estate planning can have serious unintended consequences. Assets can end up passing to someone you would not have wanted. It can often lead to litigation over the person’s estate as well, resulting in time, expense and bitter resentments which could otherwise have been avoided.

Many people are aware that if they are getting married they need to make a new Will, since at least under Ontario law a Will is revoked on marriage unless made in contemplation of marriage. Wills are not revoked under Ontario law on divorce, but gifts to a divorced spouse are construed as if the divorced spouse had died before the deceased spouse so they lapse. Wills are not affected by separation, so on separation it is critical to update your estate plan.

Unfortunately, while spouses often make new Wills on marriage, separation or divorce, they can overlook beneficiary designations for retirement plans (such as an RRSP, RRIF or TFSA) or life insurance policies, which are not revoked by marriage, separation or divorce. In fact, the plan or policy holder is protected if they pay out the proceeds to the person who is named on the last beneficiary designation the company has on file, unless they have actual notice of a new designation. Failure to change beneficiary designations and notify the plan or policy holder of the change can result in an ex-spouse receiving the proceeds of such plans.

It’s perhaps not surprising that a lot of litigation arises out of beneficiary designations. While the Court has been sympathetic to families arguing that the ex-spouse was not the intended beneficiary of the policy proceeds, in many cases the Court has held that the policy proceeds must be paid to the deceased’s ex-spouse.

One example is the case of Gaudio Estate v. Gaudio, decided in 2005, in which the deceased husband designated his wife as the beneficiary of his group RRSP and group life insurance policy while they were married. On October 15, 2004, the husband and the wife entered into a separation agreement which purported to settle all claims between them. In the separation agreement, the wife contracted out of her entitlement to a share of the husband’s estate. The husband then unexpectedly died on January 10, 2005.

The husband’s family commenced a court proceeding to obtain a declaration that the wife was not entitled to the deceased husband’s RRSP or life insurance proceeds. They argued the separation agreement should be interpreted to revoke or release the wife’s rights as the designated beneficiary of the husband’s policies. The Court disagreed. In the absence of any evidence that the husband had intended to change the beneficiary of these policies, the Court determined that the provisions of the separation agreement were insufficient to waive or revoke the wife’s entitlements. Since the husband had not changed the beneficiary designations on his policies, the Court characterized this as a choice, and found the wife was entitled to the proceeds.

In some cases, the Court has found that unambiguous evidence of an intention to revoke or change a beneficiary designation for a retirement plan or life insurance policy is enough to effect a revocation of a beneficiary designation to an ex-spouse. In many cases, however, such an intention will not be documented.

People have freedom to make or not make a Will. They are also free to make or not make a beneficiary designation. When they separate or divorce, but fail to update all aspects of their estate plan, this can have unfortunate and unintended consequences for their estate and their beneficiaries. With the proliferation of Will substitutes, such as life insurance, registered plans, pensions and TFSAs, not to mention the often very significant value of such plans and policies, it is simply not sufficient to just update your Will. But with good professional estate planning advice, these problems and ensuing litigation can frequently be avoided.

— Susannah Roth

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. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.
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