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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.

42 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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    Replies
    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?

    ReplyDelete
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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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  11. Im the beneficiary of my dads estate and his life insurance policies. He passed away and now his second wife is taking me to court. He had no money to leave her (they re both seniors) can the insurance policies be taken away from me in the family law act? What is the point of making a will(living will kit) if your wishes wont be abides by

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    1. There isn't a lot of point to using a will kit. Why? Because you aren't alerted to potential problems like your wife suing your kid over the insurance, and you're not told about how to avoid that. Home-made wills are just pieces of paper that people hope and pray are going to do something for them, without any real reason to assume they will.

      You haven't said exactly what the lawsuit is about but it sounds as if the wife is trying to have the life insurance policies directed to her rather than to you. As a general rule, a life insurance policy is not part of an estate and should be safe. However, it's not possible to say that a policy can never be re-directed because sometimes they are.

      There is a big question in my mind as to WHY she would pursue the life insurance policy. She might be alleging fraud or undue influence. She might be basing it on the idea that the beneficiary designation isn't clear and was meant to be hers. What I'm saying is that it might not be about estate law principles but about contract law or some other aspect.

      Lynne

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  12. So my brother passed away I expected and he had named his girlfriend his beneficiary on his life insurance plan at work. Before he died he was planning to leave her, however he passed before he could, so she was to receive his life Insurance. However she committed suicide 2 days after my brother died. She was still legally married to another man, and she didn’t have a will, so all my brothers money was given to her soon to be ex husband. Is there anything I can do? It just seems wrong that her ex would be entitled to that money.

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    1. That's a strange way for things to work out, but I think it's legally correct. The life insurance was paid to the named beneficiary. You can't argue with that. Then the beneficiary of the policy died and the funds, which were in her estate, were distributed according to intestacy law.

      Verbal discussions about people intending to leave each other don't do much when it comes to the law. The law assumes that the last papers you signed (including a life insurance designation) were your wishes. It has nothing to do with whether it "just seems wrong" because that's a moral judgment, not a legal judgment.

      Unfortunately, it seems you are stuck with this odd and ironic result.

      Lynne

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  13. My father very recently passed away, his beneficiary is an ex girlfriend. My father had all intentions on changing the beneficiary to me. The new papers for the change were prepared and waiting for him to sign. Unfortunately he became completely bed ridden and was unable to sign the new documents. Can I contest this? Since the intent was there for him to change it?

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    1. It would be next to impossible to contest this. The issue is that as far as the law is concerned, the deceased's wishes and intentions are conveyed by what he has signed, not what he may or may not have intended to sign. Certainly you believe the intent was there, but you'd have a very hard time proving it when there will be someone on the other side arguing that if he had intended it, he would have made it happen.

      Not impossible, but nearly so, IMO.

      Lynne

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  14. My dad passed away and left me everything including me being his beneficiary for his life insurance policies outside the will. His wife is now sueing me or she said she is but hasn’t done anything as of yet. I have now had to hire a lawyer who says I can lose everything including the insurance policies. What is the point of having a will if the deceased wishes are not carried forward. I have complied with what she asked for from her lawyer but she has not given my lawyer anything. My lawyer said she has 2 years to put a claim forward. I was also told by a family law lawyer that for the compensation it only goes on what is in your bank account but I could lose everything. How is this fair. He was my dad this was his wife’s 4th marriage and they were only married 9 years. They verbally agreed that I get what was his and her daughter gets her things and she even told me that. She made more money than my dad so why would any judge give her everything she even stole from my dad while in the hospital and that is fraud so I could charge her if things escalate.

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  15. My moms life insurance policy still had my deceased father as beneficiary. I am the executor of her will but what happens to the money? Does it become part of the estate and do I have to pay her credit card with that now?

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    1. Yes, when the beneficiary is deceased the funds get paid to the policy owner's estate. Yes the funds should be used to pay your Mom's debts. Only after debts are cleared can the money be used to pay out beneficiaries.

      Lynne

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  16. Hi Lynne

    I have a similar case my father passed away still had an old insurance policy with my mother as the beneficiary . But my mother has been deceased for 20 years and he never changed it I guess. He remarried and had no will but now his new wife is the executor . I have a couple questions

    1- why does she get to be the executor over me if there was no Will do I have any right to executorship?
    2. He promised me( verbally ) some of his assets some stamps collections and precious metal coins and such if he were to pass away do I have any rights to that ?

    3. Since my mother is deceased does the policy beneficiary become me or his estate ? And if it's goes to his estate does that become an asset of the estate and is that included in the total value of his estate ? if so do I not have a claim at the very least to residue assets over 200,000 $ any advice on the matter would be gratefully appreciated I am in complete grief and pain any clarification would help . Thanks !

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    1. Hi Jack,
      There's a lot going on here but I'll try to at least hit the highlights.

      When there's no will, the law in each province says who gets to be administrator. In every province, a spouse comes before children. You would only have the right to be administrator if his wife had signed off saying she didn't want to do it.

      A verbal promise of giving you some items doesn't give you a right to them. Hopefully your step-mother won't have an issue giving them to you if you ask.

      Because the named beneficiary of the policy predeceased your father, the insurance proceeds fall into the residue of the estate. No, you do not replace the beneficiary if you are not named on the policy.

      Yes, as a child of the deceased, you have a right to share in the residue once the spousal share is dealt with. You are entitled to see an accounting of the estate to determine what your share will be.

      Lynne

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  17. When my ex left, I continued to pay for the life insurance on him, where I was the beneficiary. He made a will (approx. 10 yrs after divorce) and then proceeded to go to Antigua and marry his then girlfriend. The lawyer was not aware of their plans. I understand that this invalidates the will. He has now passed. Does this change my life insurance situation? The beneficiary was never changed, and I have continued to pay the premium.

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    Replies
    1. In some provinces, getting married after you make a will invalidates that will. Apparently you live in one of those provinces, if you have been told by a lawyer that the will is now invalid.

      Invalidating the will does not change your life insurance policy designation. This is because the designation of you as beneficiary was not created by the will; it was created by the contract between the insurance company and your ex.

      Lynne

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  18. There is an insurance policy that was divided between 3 minor children and myself. The mother of the children was not named a beneficiary and is contesting it to try to get what my husband left for me for our home to be given to her because she can't access their funds...which is substantial. What if anything, can I do in this case?

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    1. There would appear to be some facts missing here so I'm going to have to do some guessing. Your husband, I assume, was the father of those children and ex husband of the mother of the children.

      She is not entitled to have access to her children's money, nor is she automatically entitled to receive something from the estate. However, there may be facts that would change that.

      For example, she might be entitled to something from the estate if your ex owed her child support or if their matrimonial property division was not yet completed.

      She might be claiming dependent's relief for the minor children on the basis that they were not adequately provided for in the will. The funds left to minors are always left in trust as required by law, but perhaps the trusts are set up in such a way that she has no funds for raising the kids.

      I can't say what you should do because I don't know the basis of her claim, I don't know what was in the estate, and I don't know anything about the trusts for the kids. If you are concerned, I suggest you hire a lawyer locally who can sit down with you and examine all of the paperwork to help you come up with a strategy.

      Lynne

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  19. My boyfriend's father passed away in September, he didn't have a will but had a life insurance policy in which he named one of my boyfriends sister's as the beneficiary.
    The oldest sister is now threatening to get a lawyer to get money from the policy.
    There was only 1 person named in the life insurance. The oldest sister seems to believe that their father had said there would be money for her kids (8 of them) but there is no proof of this.
    It wasn't a huge policy, less than $10000, does the oldest sister have grounds to sue?

    ReplyDelete
    Replies
    1. From what you've said, no there is no legal ground for the sister to sue for the life insurance proceeds. If anything, her issue would be with his estate, not his life insurance policy (which is not part of his estate).

      These things are always very fact-specific. I assume when you say there is no proof of the father's intention to share the policy among his grandchildren that there is no note, no emails, no anything at all in writing.

      This doesn't mean that she can't start a lawsuit and try to prove there was fraud or something, but that would be a really long shot and she'd likely be wasting her money.

      Lynne

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  20. Hi Lynne,

    My father has recently passed and ive been helping my mom with trying to process the essential paperwork to relieve financial stress. My fathers main employer life insurance papers list my mom as beneficiary but his pqrt time employer life policy listed my brother. Came as kind of a shock to all of us...question is , can he just now keep that and walk or is my mom entitled to any as they were still together at time of his passing?

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    1. Your Mom is entitled to the proceeds of the policy that names her as beneficiary. She is not entitled to keep a policy that names another person.

      The fact that they were together is, by itself, not a deciding factor. If there was fraud or coercion or some other unusual situation, there is a possibility that your Mom could persuade the courts to re-direct the proceeds (after a trial) but that is very rare.

      Lynne

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  21. My GFS son named her on his life insurance his ex sons mom is now contesting it can she do that. And my gf got accidental death payment. Can she come after her for that to .We're in Ontario.

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    1. Okay, I think "my GFS son" means "my girlfriend's son". So far so good. But who is "his ex sons mom"? I don't understand the relationships here.

      Lynne

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    2. My daughter had a life insurance when she get married she appointment her husband as beneficiary. Since then had four children and they were separated. She was diagnosed with cancer . she wrote a hand written will designating the life insurance to her four kids, but she past before she could change the beneficiary, Her husband after she died claimed the life insurance and received it . He knew about the will but he didn't wait for the estate. are this allowed , and what can be done

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    3. Whether anything can be done about the life insurance claimed by her husband will depend very much on the wording of her handwritten will. It is legally possible to change a beneficiary designation by using your will, as long as it's absolutely clear that's what you intend to do and as long as the policy in question can be identified.

      No, it is not allowed for someone to claim an insurance payout they are not entitled to, but so far the paperwork says that he is entitled to it. At least until her will is held up by the court.

      I doubt very much that you will get any cooperation at all from the insurance company. They paid out the contract according to the instructions they had and will not see any reason to pay someone else on the same policy. You will have to go to court.

      You will have to ask the court to say 1) that your daughter's will is valid, and 2) that she intended to change her beneficiary designation. If you are successful, her husband will be ordered to repay the funds.

      My expectation is that once the lawsuit is started, he will settle the matter long before it ever gets to a trial.

      Lynne

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  22. I am listed the beneficiary on a friends work insurance. He passed away. The insurance company contacted me, and the medical examiner and his estranged family will not release the toxicology report to the insurance company. So why are they not obligated under Alberta law? Do I need to hire a lawyer?

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