Beneficiary Designations – Dangers and Benefits


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Like many teenage boys, I loved Shop class! After years watching my father use power tools, I was finally going to learn to use them myself!

It wasn’t as easy as that though. We spent many hours studying their features, benefits and dangers. Finally, we were able to use them safely, always under the watchful eye of our shop teacher. The lessons learned in shop class helped me understand other dangerous tools in financial and estate planning. Beneficiary designations are no exception. Here are the key benefits of beneficiary designations that we need to understand. We must learn how they can help transfer wealth without hurting others in the process:
  1. Beneficiary designations can be used with life insurance, insurance company segregated funds and various annuity contracts.
  2. Beneficiary designations can be named on registered plans such as RRSPs, RRIFs, TFSAs, LIRAs, LIFs etc.
  3. By naming beneficiaries, many of our financial assets can transfer smoothly to our loved ones. We can also name favourite charities, corporations or trusts without costly probate or legal costs.
  4. We can also name contingent beneficiaries. For example, John and Mary appoint each other as beneficiaries on each other’s’ RRSPs ,TFSAs and life insurance policies. They are concerned these funds will get tied up in the estate and subject to probate fees. So, they name their two adult children as contingent beneficiaries should John and Mary both die first. Sadly, the use of contingent beneficiaries is not often discussed when setting up your accounts or insurance policies. Make sure to raise the issue with your financial institution.

Beneficiary Designations are power tools

Your estate plan can go sideways if you forget to review your beneficiary designations. Do a beneficiary audit whenever life changes. That includes marriages, births, deaths, etc.. For example, newlywed couples often still have their parents as beneficiaries on their insurance policies and RRSPs. Worse yet is the case of the newly married husband who still has his old girlfriend listed! Minor children are not legally able to accept funds, so you need to exercise caution here. In this case, use a trustee, preferably through a formal trust or the use of a trust declaration. The same goes for naming a spendthrift beneficiary or beneficiaries with special needs. These situations should be coordinated with your advisory team. Planning your estate alone is very much like letting a bunch of teenagers loose with a room full of power tools! Don’t do it alone.

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