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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.

18 comments:

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

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    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.

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    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?.

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    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.

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  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.

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  7. My father just passed and his life insurance has 6 people listed as beneficiarys. One is his mother who passed away 11 years ago and another is his ex who nobody has spoken to in 14 years. The insurance company told us if we can't track down his ex then the entire policy gets withheld. Is that legal? Can we do anything about it?

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    1. No, the policy cannot be withheld. When an insurance company knows it has to pay out a policy but there is trouble finding or identifying the beneficiaries, the policy is usually paid into court. The company cannot just keep it.

      When the policy is paid into court, the people who are claiming it (the beneficiaries) then need to talk to a judge, who will straighten out what needs to happen and who will get the money.

      This sounds scarier than it is. Most likely the judge will order that four of you will get your portions, and he or she will decide whether the shares owned by the mother and the ex are to be held by the Public Trustee or otherwise dealt with.

      Lynne

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  8. Lynne,
    My partner's ex wife has passed. While married, they obtained a life insurance and named each other as beneficiaries. The beneficiaries have never been changed (nor has the will in force).

    Since her passing, one of his daughters has proceeded with legal action stating that she should be the beneficiary taken that they are no longer together, with no supporting documents.

    The Insurance company has been withholding the money until now. They are preparing to pay into court. This has been going on for over a year and has torn his family apart.

    How long should one expect resolution from the time it has been paid into court? Can an insurance company withhold the money when he is clearly indicated as beneficiary?

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    1. To be fair to the insurance company, they aren't withholding it. The fact that they are willing to pay it into court means that they are willing to pay it out, but they don't want to be sued by one of the parties who has a claim.

      I'm surprised that the daughter is bringing a lawsuit like that. Obviously there are additional facts that would lead her to believe that the owner of the policy intended her to have it.

      In my opinion, just the fact that they got divorced will not be enough to show that the beneficiary should be changed. I know of MANY cases where divorced people kept an insurance policy in place naming the ex, for one of many possible reasons.

      Hopefully once it's paid into court, you will be able to retrieve it without going to a full trial of the issues, which could take years. Perhaps it's something that could be resolved at the chambers level of court.

      Is there any possibility of the two parties agreeing to split the policy in order to avoid wasting thousands of dollars on legal fees?

      Lynne

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  9. Hoping you will be able to shed light on a particular situation. My father died recently and had a life insurance policy that was split between two beneficiaries. Larger portion given to 1 beneficiary due to that bene splitting fund with siblings into equal portions. Shorty before he deceased the policy was changed to unequal portions and the bene was changed to the child of the deceased (it was previously his girlfriend And his other child but now it is his girlfriend's child and his child). My father said in November he had no interest in changing his policy while in the hospital. The agent, which is a friend of the other beneficiary (his girelfriend) claims my father had called her and requested that she come to the hospital. However, there had been no record of that call being made. We know the insurance agent and the beneficiary are good friends and can prove that and it seems the agent had her friends benefits in higher regard than his own, can't prove that without a lawyer. After reading the insurance law in Canada I saw that insurance companies won't pay out funds to minors and instead will pay it to the trustee. I strongly believe the agent spoke with the friend (again, can't prove without lawyer) and determine that she could get more money if the beneficiary was changed to the child. (Given that she knew my father wanted to remove her (can be proven) it would be suspicious if the percentage increased for her rather than his supposed new child. My father was under heavy medication in the hospital and it was proven by the doctors that it impaired his decision making skills. My question is should I bother to fight this case or just accept it ? I'm more trying to prove that the insurance agent is not acting in good faith and did not have my father's best interest at hand. Sorry for the long and confusing post.

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    1. I wonder whether it would be worthwhile for you to take this up with the bosses at the insurance company. There are problems with using the courts. For one, I don't believe that you are a person who is involved in the policy or as your father's POA so I;m wondering whether you'd even have legal standing to bring a lawsuit.

      I think you'd have a really tough time trying to prove that the agent is not acting in good faith. It's always hard - in fact sometimes impossible - to prove what is going on in someone's head. The argument that someone is friends with someone else is weak. ALmost every day I hear a complaint that someone's lawyer was friends with someone else and therefore favoured that other person. In reality, not many lawyers, insurance agents, or other people will risk their entire license to practice for just any friend. Just not worth it at all and therefore doesn't really happen frequently as people think it does.

      If you can prove your father's instructions to the agent, it would probably be faster, more private, and a million times cheaper if you could get action from the insurance company.

      I'm not saying it's impossible to prove in court, but perhaps there are other ways to achieve your goal.

      Lynne

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  10. My common law spouse and I have been separated for 3 years approx
    We have remained close however.
    A month ago he passed away
    His daughter was appointed the executor of his estate.
    Recently the daughter contacted me ...and said I was the beneficiary on his group life insurance. She is unwilling to give me a copy of the death certificate until her and I come to an agreement on splitting this money fairly between her and I
    What do I do now ? As she is executor of the estate I can't get a death certificate from anywhere.
    Without the death certificate I am unable to fill out a claims report
    She also said if she didn't hear from me she would take care of it herself and dissolve the money.
    What are my rights here and any advice?

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    1. Wow, she sounds like a piece of work. What a bully! You are under no obligation to share life insurance money with her.

      Go around her. You might try going to the provincial registry or vital statistics office and getting a death certificate. You do have to say why you need it, but you have a good legal reason. If that doesn't work, call the funeral home and ask for a Funeral Director's Statement of Death.

      She might try to take the money herself but the only way she could get the insurance company to pay it to her is to lie to them and say you have passed away. That's fraud. The insurance company will not want to be involved in her games and if it can't be straightened out they may choose to pay it into court and be rid of it.

      You have the right to that policy. If she won't cooperate and you simply cannot get the money without her help, you might end up hiring a lawyer to deal with her. This is highly unlikely to end up in a lawsuit because she has no right to do what she's doing, but the lawyer can help you get the answers you need.

      Lynne

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