Naming your beneficiary is a big decision, yet most of us may give it little or no consideration at all. At some point in your life, you may have to buy a life insurance policy or you get a new job with a retirement plan—and you receive a form with a section to fill out with the names of your beneficiaries. Many people, unprepared, leave it blank or complete the section quickly without really thinking it through.
Keep the following in mind as you consider who could benefit from your investments or insurance if something happens to you:
- Failing to name a beneficiary - If you don’t name a beneficiary on your life insurance policy or investments, your assets could go through probate when you pass away and face otherwise avoidable tax consequences.
- Naming minor children - If you direct the proceeds of your life insurance directly to your minor children rather than a trust for them, a judge will decide who manages the money.
- Naming a child with special needs (or a dependent adult) - When you name a child with special needs, rather than a trust for his or her benefit (if they qualify for a trust), you may unintentionally disqualify them from receiving much-needed government benefits.
- Ignoring spousal rights - Although you don’t have to designate your spouse as a beneficiary of your registered retirement plans, you can’t name someone else unless they sign a waiver if you live in a community property province, such as Quebec, Ontario or Alberta. Otherwise, you may put your beneficiary's inheritance at risk.
- Ignoring tax consequences - Because estate tax varies from province to province, be sure to talk with your tax advisor to avoid unnecessary tax implications before you name a beneficiary.
- Failing to update beneficiary forms - Whenever you have a major life change, check out your beneficiary designations. Forgetting to update the beneficiary form may mean the wrong person gets your assets (example: an ex-spouse).
- Naming only one beneficiary - If this beneficiary dies before you, a judge may have to decide how your assets (like a Registered Retirement Savings Plan or Registered Retirement Income Fund) get distributed. Naming a contingent beneficiary, or if you intend to split the benefit, two or more beneficiaries, which can reduce this risk.
- Using non-specific beneficiary designations - Listing “my children” as your beneficiaries can lead to many problems after you're gone, particularly if you have a blended family (many provinces do not recognize step-children as “children”) or if one of your children predeceases you (that child’s share may go to your other children, not that child’s children).
- Losing your beneficiary designation forms - If you lose your beneficiary designation form that proves the status of your beneficiaries, the default provision of your accounts or policies applies. In other words, in the absence of a beneficiary named by statute or in the contract, whatever is on file with the insurance company applies – not the default. This may mean, if you’ve updated your beneficiaries but not filed notice of this with the insurance company, that there could be a conflict, for example, your spouse or estate could receive your worldly assets even if you didn’t intend this. It’s a good idea to keep your beneficiary forms in a safe place.
Read more on this topic:
Common Wealth Transfer Mistakes (Manulife PDF)
The Importance of Advisor Designations, Advisor.ca
Beware ill advised beneficiary designations, Toronto Estate Monitor