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Sunday, September 9, 2018

Beneficiary designations need to be made thoughtfully

When you're having your will made, there is much more to it than simply telling the lawyer who you want to name as your executor and beneficiaries. Your lawyer should do a thorough review with you of your legal and financial arrangements. There are several reasons for that, but the one I want to talk about today is that beneficiary designations must work with your will and all of your other arrangements.

Beneficiary designations are the names you've put on assets such as life insurance policies, RRSPs, RRIFs, and pension plans. When you  purchase or set up one of these assets, you are asked who you want to receive the funds on your death, and you name - or "designate" - a beneficiary.

If it has been several years since you set up your beneficiary designations, it's a good idea to take a minute to think about whether your designations are up to date. Have you gotten married or divorced since you named your beneficiary? Have you had more children? Is your financial picture quite a bit different than it was back then? Check your paperwork or call the bank to make sure you know who you have named.

It's important to consider carefully who you want to name as beneficiary. There can be unexpected consequences if you don't fully understand how it's all going to work. For example, a scenario I see often is that a parent in a second marriage has left an asset such as an RRSP to her children of the first marriage. In her will, she wants to leave some money to her spouse. Most of the time, the person describing this situation to me is not aware that by leaving the RRSP to the children, she will incur a large tax hit. Simply moving things around so that the RRSP goes to the new spouse and the other funds go to the children would save the tax.

This doesn't mean that there is one right way to do things that suits everyone. There is no such thing as an answer that is right for everyone. What works for your sibling or friend or co-worker might not work as well for you. This is why you should talk through your specific situation with your lawyer or advisor.

Keep in mind that when a beneficiary is designated on an asset, that asset is not part of your estate. It is not covered by your will and it is not handled by your executor. This may or may not be what you want. If you have designated your children as the beneficiary of a policy or plan, are you alright with them receiving the funds in one lump sum on their 18th or 19th birthday? If not, perhaps you need to think through your beneficiary designation more carefully. A possible alternative is to designate your estate as the beneficiary of the asset, then use your will to hold the funds in trust for your children until they are older.

I often find that people I talk to are confident about their beneficiary designations based on something they once read or that someone mentioned once. How reliable is that information? How well did the person understand it? Is it really applicable? The best way to know for sure is to understand that every person's estate and life is different and advice just has to be tailored to the individual situation.

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