Introduction
You can’t take your money with you at the end of your life. So, you might expect more Canadians would name a beneficiary. However, it’s surprising how many of us haven’t done that, says Sun Life advisor Brent McKay.* Or, how many Canadians haven’t updated their beneficiaries after a life change like divorce or a growing family.
Naming a beneficiary only takes a few minutes, costs nothing, and doesn’t require help from a lawyer. An advisor can help guide you on choosing beneficiaries or determine if a trust may be more appropriate.
What is a Beneficiary?
A beneficiary is a person who is entitled to a certain benefit. For example, a named beneficiary on a life insurance policy receives the death benefit.
What Does Naming a Beneficiary Mean?
Naming a beneficiary is when you choose (and officially “name”) who will receive the proceeds of your:
- Registered investment accounts,
- Insured wealth products or insurance policies, or
- Other benefits when you die.
Naming beneficiaries helps ensure your loved ones receive what’s intended for them, especially for those with families.
Who Can You Name as Beneficiary?
You can name anyone you wish as your beneficiary. People often name their spouse or children. Naming a beneficiary or trust provides greater privacy since funds bypass probate (which is public).
What is a Contingent Beneficiary?
A contingent beneficiary is someone who receives benefits if the primary beneficiary has died at or before the time the benefit needs to be paid.
Can You Name a Business as a Beneficiary?
A business can get what’s called key person insurance. This policy insures someone vital to the business's operation and success, like an owner, partner, or key employee.
What Are the Benefits of Naming a Beneficiary?
There are three main benefits:
- More Money for Beneficiaries
- Proceeds bypass the estate, avoiding taxes and probate fees.
- Privacy
- Beneficiaries can receive proceeds directly, maintaining confidentiality.
- Ease for Spouse
- Spousal rollovers for RRSPs or TFSAs ensure smooth, tax-free transitions.
What Happens if You Don’t Name a Beneficiary?
If no primary beneficiary is named:
- The death benefit will go to your estate, possibly reducing its value due to taxes and probate fees.
- Debts and taxes are paid first, with remaining assets distributed per your will.
Who Can You Name as a Beneficiary if You’re Single?
If you’re single, you can name:
- A relative,
- A close friend, or
- A charity to support a cause dear to you.
Can You Name a Minor Child as Beneficiary?
You can name a minor child as a beneficiary, but they may not have access to funds until reaching the age of majority. A trust is often a better solution to manage and distribute funds.
Can Investment Accounts Have Beneficiaries?
Yes, beneficiaries can be named for accounts like:
- RRSPs,
- Locked-in Retirement Accounts (LIRAs or LRSPs), and
- Segregated funds or annuities.
Do You Need the Same Beneficiary for Everything?
No, you can assign different beneficiaries for different accounts or policies. For example, one child can inherit an RRSP, while another inherits non-registered investments.
How Often Should You Review Your Beneficiaries?
Review your beneficiaries:
- Annually, to reflect changes in your preferences.
- After major life events, like marriage, divorce, or the birth of a child.
Conclusion
Naming a beneficiary is a simple yet crucial step in estate planning. It ensures your loved ones are cared for, minimizes tax implications, and avoids unnecessary legal hurdles. For guidance, consult an advisor to maximize the benefits for your family and estate.
This article is written for educational purposes.
Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.
Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.
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