Should I designate a person or my estate as beneficiary?

You readers come up with great questions for me, there's no doubt about that. And I do my best to answer as many as I can! Here's one about beneficiaries that I know many people would like to know more about.

The question:

"It would seem to me that naming a person as a beneficiary instead of an estate would be the easiest and fastest route for distribution. Is there some benefit that I can't see to naming an "estate" as a beneficiary?"

There are very good reasons for naming your estate as beneficiary rather than an individual person. But it all depends on what the asset is, who the person is, and the estate set-up as a whole. In other words, there is no one right answer for everyone and you have to figure it out differently for each person. But here are some things you may not have thought of:

Let's look first at RRSPs and RRIFs. If you have a spouse, you will probably name your spouse as beneficiary to take advantage of the tax rollover. But if you don't have a spouse, who do you name? Many people at that point name "all my kids". In a lot of cases, they might be better off naming the estate. For one thing, there is no tax advantage to naming your children because there is no tax rollover (except in certain circumstances where the child is handicapped). Secondly, most people leave their estates to their children, and say that if the child has predeceased, the child's children get the child's share. This won't happen to money in an RRSP if a child predeceases you. It will be split among the remaining named children and none will go to your deceased child's children.

Also, if you leave your RRSP to one of your children, that child will get the full RRSP value and the tax on it will be paid by whoever is inheriting the rest of your estate, presumably your other children.

Now let's look at real estate. Having your spouse on the title to your home so that they inherit the home makes perfect sense in the majority of cases. However, many people do what they think of as estate planning by putting one or more of their children's names on their homes and cottages so that there is no need to go through probate. I can't even begin to describe the number of ways in which this backfires. Confusion, delays, lawsuits, tax issues, fights between siblings - all of this and more happens when you try to bypass probate this way. It's such a bad idea I can't believe anyone still does it.

Next, life insurance. There are plenty of good reasons to name individual beneficiaries of life insurance policies, and I don't argue with any of them. However, sometimes there are reasons to name your estate to receive the life insurance funds. One of the main purposes is to create some cash in your estate to pay for taxes. Having money for taxes could be the difference between having to sell something inportant, such as the family cottage, and keeping it. Having cash in the estate will pay for funeral expenses, pay off debts and allow all beneficiaries to receive a larger inheritance.

Also keep in mind that when you leave life insurance or RRSP to a child, they will inherit it all when they reach age of majority. You may or may not think that that's a suitable age for someone to receive a large sum of money.

As you can see, there are many ways for a person to deal with any particular asset. Sometimes naming an individual as the beneficiary of an asset is exactly the way to go, and sometimes it's not. The best way to get advice about this is to sit down with an estate planning lawyer and look at that asset together with all the rest of your assets in the context of your family and your goals. Make sure it all works together.