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Sunday, May 2, 2021

No, acting under a POA does not allow you to change a beneficiary designation, even if it matches the will

I'm always glad that people ask a question before going ahead and trying to take steps that end up being a problem. This reader is asking about a step that I hear about often, which is a person under a Power of Attorney attempting to change a beneficiary designation on behalf of the incapacitated owner of a registered financial instrument. In fact, I have just last week concluded a lawsuit which began because a person acting under a POA tried to do exactly that with both an insurance policy and a RRIF. The bank and the insurance company both stopped her, but it soon turned into a big schmozzle and I was hired by the person who was the beneficiary named by the incapacitated owner. I honestly don't think she was a bad person; she just didn't realize the limit of her legal authority.

Here's the question:

"If the POA has moved from spouse to child - due to spouse's passing - can the child POA update the benefiary - which still lists the deceased spouse - to the division amongst all children that is written in/ supported by the will?"

The short answer is: absolutely not!

Your obligation under the POA is to keep things running, maximize the estate, and safeguard the finances of the person you are looking after. You don't have the right to change his or her plans as set out on a life insurance policy, LIRA, RRSP, RRIF, or any other policy or plan on which the person has made a designation. When the named beneficiary is deceased, the proceeds will be paid into the owner's estate.

You mention that the will leaves the estate to the children and therefore it may seem that you are simply updating the designations to match the will. But you do not have the legal authority to do that. 

Beyond the question of authority, there is also the fact that leaving money under a beneficiary designation and leaving it under a will do not always have the same outcome. You may think you are "matching the will" but that may not be the case. Let me give you an example. 

Let's say a Mom has a RRIF that leaves money to five children. There is also a will that says the estate is divided among five children, and if one of the five should predecease Mom, that person's share of the estate goes to that predeceased person's children. Very common situation.

Now let's say that one of the five predeceases the Mom. Now the RRIF goes among the four surviving children. There is nothing to give the children of the child who passed away because the RRIF is paid directly by the bank and is not controlled by the will. There is unlikely to be anything on the RRIF itself that gives a gift over to grandchildren. Instead of each child getting 20% of the RRIF, each gets 25% of it. However, the tax for the RRIF comes out of the estate, so it reduces the inheritance for ALL beneficiaries, including Mom's grandchildren who did not get a share of the RRIF but who will share in whatever is left in the estate.

If that same money was not in the RRIF but was in the estate, the share of the predeceased child would take the portion that their parent would have received. The tax still comes out of the estate, but at least they will receive part of the RRIF money. In addition, the will can control the age at which beneficiaries inherit so that they don't get a cheque for the full amount on the day they reach the age of majority.

Also consider that if a beneficiary receives RRSP or RRIF money but there isn't enough in the estate to pay the tax, CRA will pursue the individual beneficiary for the tax. This is quite a different scenario than leaving a taxable instrument to the estate, which does not involve the beneficiaries in personal tax liablity.

So you see, changing a beneficiary designation changes more than you think. 

1 comment:

  1. Thank you for such a clear explanation of POA and beneficiary entitlement.


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