Divorce doesn't change your beneficiary designations

Today I had a phone call from one of the Scotiabank branches I work with. A customer was dealing with her father's estate. The father's will said that everything he owns should be divided between his two kids. Now here's the problem: when the father got divorced years ago, he didn't change the beneficiary designation on his RRSP. He left the designation as his ex-wife.

The RRSP contained $100,000 and was by far the largest asset of the estate, which was otherwise modest. The customer found out from our branch that not only was the ex-wife going to receive the RRSP, but the rest of the estate was going to be used to pay the tax on it. The kids weren't going to see a dime.

It was at this point that our staffer called me to see if this could possibly be right, since it seemed so unfair. Unfair or not, it is the law. The will didn't change the beneficiary designation on the RRSP. Neither did the divorce judgment. If the father didn't want his ex-wife to receive the money, he should have changed it some time over the years since they divorced. Otherwise the law will presume that he intended to leave her on as beneficiary.

This is not an uncommon situation by any means. I see several estates like this every year. Unfortunately, if this client's father, who made his own handwritten will, had spent even ten minutes talking to an estate planning lawyer, he would have found out that his money would go to his ex and not his kids. He probably didn't realize the importance of changing what must have seemed like a paperwork detail.

All divorced or separated people should realize that nothing automatically changes your beneficiary designations. They don't change unless you take steps to change them. A divorce settlement, separation agreement or Minutes of Settlement that contain standard boilerplate words to the effect that you and your ex won't make claims against each other's estates won't change anything. Receiving money when you're the designated beneficiary is not "making a claim" so this clause doesn't apply.

It's bad enough to lose a parent. Having them leave an estate mess behind is a nightmare. Do your children a favour and find out how the law affects you before you sign a legal document, even if it's one you wrote yourself.

Should I re-do my will when I am separated from my spouse?

While at one of the local Scotiabank branches yesterday, I happened to stop to chat briefly with a customer. She said that her banking officer had just told her that because she is separated from her spouse, she should re-do her will. She didn't really understand why. She isn't alone; many of us don't really think about wills during that particular life event, and even if we do, we don't necessarily understand the implications.

In many parts of Canada, including here in Alberta, becoming separated or even divorced from your spouse doesn't have any legal effect whatsoever on your will. Most married people have wills that leave their entire estates to each other. Usually you're not quite so keen for the person to have your whole estate if you're not married to them anymore.

You could, for example, spend a year or so battling through your matrimonial property division until all assets are divided. But if you are killed in a car crash and haven't changed your will, your former spouse will get everything right back again under your will.

This isn't the same everywhere. In Ontario, separation has no legal effect on your will. However, if you are divorced, the parts of your will dealing with your spouse are rescinded. Your will might be alright, but then again it might not. If you appointed your spouse as your executor, as most married people do, and then left the whole estate to him or her, rescinding those parts of the will might have the effect of rescinding pretty much all of your will.

Your goals have changed now that you are separated, and your will should reflect that to make sure that your current wishes are carried out. Most people will want to focus on leaving funds to the children or if there are no children, to other family members and charitable organizations.

Making a separation agreement in which you both agree not to make claims on each other's estates (which is standard boilerplate language) does not in any way change your will.

In my view, the banking officer was absolutely right to alert the customer to the need to look at her will during her separation. This is good advice right across the country.

Does my separation agreement change my Will?

When couples marry, they usually make Wills leaving their estates to each other. They also name each other as the beneficiary on life insurance policies, RRSPs and pension plans. When a couple separates on the road to divorce, they no longer want to leave everything to each other. They go through a period during which custody of the children is worked out and the assets and debts they gathered as a couple are divided between them. The end result is often a separation agreement, minutes of settlement or some other written agreement between them.

A phrase that is often used in this kind of document is a general statement that the parties release each other from all claims against each other's estates. This seemingly harmless statement has caused problems for individuals who misunderstand how it affects them. Much to the dismay and disbelief of many a spouse, this clause does NOT mean that the ex is no longer the beneficiary of the policies and plans.

The intent of the "no claims" phrase is for both parties to the agreement to indicate that they believe the property settlement in the agreement is fair and they agree to it, and as a result will not make any claims for financial support from each other's estates.

Plans and policies with a named beneficiary don't fall into your estate.

If you have named your spouse as the beneficiary of an insurance policy, RRSP, segregated funds, pension plan, ESOP, LIRA, etc, the general "no claims" language of a separation agreement will not change that. You still have to change it yourself.

The only way to use a separation agreement to change a particular plan or policy is to specifically identify that plan or policy in the agreement. For example, with a life insurance policy you would have to name the policy number and the insurance company. Even then, you would be smart to contact the insurance company, pension administrator or bank directly to make the change you want.

Can my Will be changed without my knowledge?

The general answer to the question of whether your Will can be changed without your knowledge is "no", but as with all general rules, there are exceptions.

Nobody can make a Will in your place. A Will is a unique combination of facts, thoughts, intentions and wishes that nobody but you could have. If someone is acting under a Power of Attorney or a court-appointed trusteeship on your behalf, they cannot make a new Will for you without your knowledge (in New Brunswick they can do so with court permission only). This is not to say that you cannot have help signing your document, if you for some reason cannot physically sign it yourself. But even then, the contents of the Will still reflect your wishes and not someone else's.

A situation in which your Will might be changed without you specifically intending it is marriage. If you make a Will and then later get married, your Will is automatically revoked, unless it says in the Will that it was made in contemplation of that marriage. Having your Will revoked would certainly be a change in how you thought your estate would be distributed, as the Intestate Succession Act would dictate how it was to be divided. Also, the executor you had chosen in your Will might not be the person who ends up being in charge of your estate.

Sometimes people make changes to their Wills without meaning to. For example, a person might sign a divorce agreement or separation agreement without fully realizing how it affects his or her estate.

It works the opposite way too, in that a person can think he or she has changed the Will when he or she has not. I've met a number of divorced people who think that the general language in the divorce or separation agreement that the ex spouse will have "no claim" against his or her estate means that everything, including life insurance policies, pensions, RRSPs etc have all been changed by the agreement. Unfortunately, all of those financial instruments must be changed individually by the owner.

Also, making beneficiary designations on insurance policies might end up changing things. A common example of that happens when a parent makes a Will stating that the entire estate is to be divided among his or her children, and should one child die, that child's share is to be divided among the child's children (the parent's grandchildren). Then the parent buys a life insurance policy and puts all of the children's names on it as beneficiaries. What often isn't clear is that the policy will be paid to whichever of the beneficiaries is alive at the time, and there will be no payment to the children (grandchildren) if one child has died. Now there will be an unequal distribution of the estate because of the life insurance money.

This is one of the reasons that I do not like most people to use home-made Wills without consulting an estate lawyer. It is well worth the money to spend an hour reviewing your entire situation to make sure that everything you're doing for yourself and your family is really going to happen the way you think it will upon your passing.

As I often tell my seminar audiences, the goal of estate planning is not a piece of paper with "Will" written on it. The goal is to plan, look at everything, tie it all together and attain peace of mind. The piece of paper that you sign at the end of this process is just the proof that you've been through the process.