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Sunday, June 9, 2013

Obligations of an insurance beneficiary when the estate is insolvent

Small estates that don't have enough money to pay everyone can have unique issues. In particular, executors and beneficiaries alike wonder about the extent of their obligation to pay for estate expenses and bills. A reader recently wrote to me about an estate like that, which has the additional complication of life insurance policies being paid to the beneficiaries. I thought many of you would benefit from seeing this question and answer
 
"Five adult children are beneficiaries of their mother's small estate. However, two of the three insurance payouts were divided and paid out by the insurance company directly to the beneficiaries rather than to the estate. Of course funeral and other expenses would have required them to pony up the money they received to help pay costs and expenses in closing up the estate, however, three of the children have not given their insurance cheques to the estate and by the looks of things don't plan to. Do they have any legal obligation to give that money back to the estate until all bills are paid? In the end, if two of the children have put back all their money and the estate is left in arrears, what happens then?"
 
If the insurance company has paid the funds directly to individuals, it's because the policy owner (their mother) named them as beneficiaries of the policy. You refer to "giving the money back" as if you believe the money belongs to the estate, but legally it does not. The insurance beneficiaries have every legal right to keep that money, and in fact may not want to give it to the estate because they are honouring their mother's wish to give them the insurance.
 
You also say that "of course they would be required to pony up" the insurance money for their share of expenses, but again, this is not the case. Those expenses are the responsibility of the estate, not of the people who would inherit any surplus in the estate. I would certainly hope that these people would help to pay for their own mother's funeral simply on moral grounds, but it's not legally required of them just because they received insurance money.
 
And as for the bills - beneficiaries of an estate are not required to chip in to cover the deceased's expenses or bills. If there are unpaid bills when the estate has been depleted, that's unfortunate for those who remain unpaid. But the law doesn't make the beneficiaries pay.
 
Insurance money paid to individual beneficiaries is simply not part of the estate. Having said that, check the will to see whether it specifically changes the insurance beneficiary from the individuals to the estate. This is rare, but not unheard of.
 
 
 

10 comments:

  1. What if one of the policies was payable to the estate but got divided up and sent to the beneficiaries?

    ReplyDelete
    Replies
    1. In that case, the insurance company would have made a serious mistake. It's possible. Why would the insurance company have the names and addresses of the individual beneficiaries if that information had not been provided by the policy owner? Was the beneficiary designation changed along the way? It's not that unusual that someone says they are going to make a change, but they don't tell the insurance company. Or they change it in the will and forget to tell the insurance company.

      If the insurance company had all the right information and paid it out in error, then they have to make it right. But if it's not their mistake because they weren't kept up to date, it will take a lawsuit to change things.

      Lynne

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  2. What can be done if a judge makes a mistake. ie my 93 year old uncle died intestate. My sisters and I are his only living relatives. My mother was his only sibling. The statue says that in this case the estate is divided amongst the living nieces and nephews. The judge is say8ng the children of our deceased brothers are entitled to inherit. What can we do? He will not issue an appointment of trustee until they are included.

    ReplyDelete
    Replies
    1. If a judge makes a mistake, you would appeal the decision to a higher court. However, I wonder whether you're using a lawyer to help you? I've never seen an intestacy statute in Canada that leaves out the children of a deceased sibling, so I think you have the law wrong.

      Lynne

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  3. Would this also apply to an annuity that has a specific beneficiary? Would the beneficiary be required to give the money to an insolvent estate?.

    ReplyDelete
    Replies
    1. HI Beth,
      Yes, it would also apply to an asset with a specific beneficiary. However, in my experience, Canada Revenue Agency will occasionally come after designated assets when there is nothing to pay large amounts of tax owing.

      Lynne

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    2. Thanks Lynne. Taxes will be under $300 so they can be dealt with.

      Delete
  4. Would kindly appreciate your help. Parent left $20,000 in life insurance to son who is an Ontario Disability Support Program (ODSP) recipient. The Ministry of Community and Social Services states that up to $100,000 of cash surrender value is exempt as income for ODSP recipients, but then states that only $6,000 per year is exempt as income upon pay out. Insurance company was advised of this and states they must report interest income to the beneficiary's SIN file with CRA. ODSP would then deduct all the money from the recipient. Is there a way the beneficiary/ODSP recipient, can keep the $20,000 without having it all deducted? Thank you.

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  5. what about segregated funds held in an RRSP account? If paid to the beneficiaries immediately, do they have to pay the tax on it if the estate is owing/insolvent?

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  6. Hi Lynne,

    I was named as beneficiary on a life insurance policy that belonged to my friend. He changed over beneficiaries from someone else to myself making me sole beneficiary for the entire policy. The policy is a group insurance policy that he got through his employer. He was asked by his employer to fill out change of beneficiary forms and have the copies emailed to his HR department at work and also have the originals mailed to them. I assisted him in the process as he was ill during this time. He also put in his will that the money for the entire policy had to go to myself.

    After his passing last month his HR department is saying that they lost the original beneficiary form and threw it the garbage because it was written in black ink and the person thought it was an a copy.. Now the insurance company is stating that without the original they may not be able to issue me the payment. Do i have recourse against the employer ? I'm baffled by this as they are acting like it's not their fault and they can't do anything about it.

    ReplyDelete

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