The Mistake I See Almost Every Month
A client walks into her lawyer’s office and tells him she wants to update her will. She’s just gone through a difficult divorce. She wants to make sure her ex-husband doesn’t receive a penny of her estate.
Her lawyer drafts the new will. She signs it. She leaves feeling relieved.
What she doesn’t realise, if her lawyer neglected to inform her, is that her RRSP, TFSA and life insurance may still be going to her ex-husband if he was named as the Beneficiary on these with the actual Companies. Her new will doesn’t touch any of them.
This is one of the most common estate planning mistakes I see in Ontario. And it’s almost always avoidable.
When a client of mine is going through a divorce, the beneficiary review is the first conversation we have. Not the last.
Your Will Doesn’t Control Everything
Most people assume their will is the final word on who receives their assets. It’s not. There’s a whole category of assets in Ontario that pass outside the will. Lawyers call them non-probate assets. You may hear them called registered assets or designated assets.
These include RRSPs, RRIFs, TFSAs, pension plans, and life insurance policies. For each of these, you sign a beneficiary designation form when you open the account. That form, not your will, decides who gets the money when you die.
If the designation on your RRSP says your ex-husband, your ex-husband receives the RRSP. The will does not override the designation. The only time the Will may override the designation is if your ex-husband were to predecease you. The funds would then be paid to your Estate. At that time, your Will could expressly reference the specific RRSP, TFSA, and life insurance plans and designate a new beneficiary. However, it is always best to change the designation with the issuer of the plan.
Why These Assets Are Treated Differently
The reason has to do with how these products were designed. RRSPs, TFSAs, pensions, and life insurance are all contracts between you and a financial institution. When you open the account, you sign a contract that tells the institution where to send the money when you die.
That contract is a parallel track to your will. It lives at the bank or the insurance company, not with your lawyer. And unless you take deliberate steps to change it, it generally stays exactly as you left it. It is best not to take a chance.
The Three Upsides of a Named Beneficiary
Beneficiary designations aren’t a trap. When they’re set up correctly, they’re one of the most efficient estate planning tools in Ontario. There are three main advantages.
First, the money moves quickly. A named beneficiary usually receives the funds within weeks, not months. The estate doesn’t have to go through probate for the asset to change hands.
Probate is the legal process where an Ontario court confirms that a will is valid and officially appoints the executor (called an estate trustee in Ontario) to act on behalf of the estate. The court issues a document called a Certificate of Appointment of Estate Trustee, which is what banks, the land registry, and other institutions ask to see before they’ll release assets or transfer property to the executor.
Second, the asset avoids what most people call the probate tax. In Ontario, when someone dies and their estate goes through probate, the province charges a fee on the value of all assets in the estate. It’s officially called the Estate Administration Tax. The rate works out to roughly one and a half percent on everything above the first fifty thousand dollars of estate value. There’s no upper limit.
For a modest estate, that might come to a few hundred dollars. For a larger estate with a home, investments, and a life insurance payout, it starts to add up fast. On an estate worth one million dollars, the probate tax is around fourteen thousand dollars. On two million, it’s close to thirty thousand.
Assets with a named beneficiary skip this entirely. An RRSP that passes directly to your spouse, or a life insurance policy that pays out to your children, never becomes part of the probated estate. It isn’t counted when the tax is calculated. That can save the family real money at a moment when real money matters.
Third, in the case of life insurance, a named beneficiary provides a measure of creditor protection. If the estate owes debts, those debts generally can’t touch money that passes directly to a named beneficiary on a life insurance policy.
The Problems I See in My Practice
The upsides only apply when the designation is correct and current. Here are the problems that cross my desk.
The Ex-Spouse Who Never Got Removed
The most common problem. A client updates the will after a separation but forgets to update the beneficiary forms at the bank and the insurance company. Ontario law doesn’t automatically revoke a beneficiary designation in favour of an ex-spouse. The old designation stands until you change it.
I can’t overstate how often this happens. If you’ve separated or divorced, the single most important afternoon you can spend is at your bank, updating every beneficiary form you’ve ever signed.
Naming the Estate as Beneficiary
Sometimes a client tells me, “I named my estate as the beneficiary, so it all passes through my will.” That works, legally. But it throws away most of the advantages. The asset now goes through probate. It gets hit by the Estate Administration Tax. It is exposed to estate creditors. And the family waits months for the money.
There are situations where naming the estate is the right call, usually when the will sets up a trust or directs the money in a complex way. But it should be a deliberate choice, not a default.
Naming a Minor Child
Parents sometimes name a young child directly as the beneficiary of a life insurance policy. I understand why. You want the money to go to the child if the worst happens.
The problem is that Ontario doesn’t allow a minor to receive a large insurance payout directly, for obvious reasons. The money has to be paid into court, or managed by the Office of the Children’s Lawyer, until the child turns eighteen. At that point, the money is handed over in a lump sum, regardless of whether the child is ready to manage it.
A better approach is usually to create a trust in your will, and name the trustee as the beneficiary of the policy. A good estate lawyer can set this up in a way that protects the child and gives your chosen trustee the discretion to support them.
Forgetting the TFSA
TFSAs are the forgotten child of beneficiary designations. A lot of Ontarians opened a TFSA at the bank and never thought about who would receive it if they died. The default, in that case, is that the TFSA becomes part of the estate. It loses its tax-sheltered status on the day of death, and it gets taxed going forward.
If you’re married or in a common-law relationship, you can name your spouse as the successor holder. That lets the TFSA roll over into their name and keep its tax-sheltered status. It’s a small form to sign. Most people never sign it.
Pension Plan Beneficiaries
If you have a workplace pension, your plan has its own rules. Ontario pension law gives significant rights to a married or common-law spouse, and those rights sometimes override even a beneficiary form. If you’re in a second marriage, or if your pension is a major part of your estate plan, talk to your lawyer and your pension administrator before making assumptions.
How to Review Your Own Designations
Here’s what I recommend to every client during an estate planning review.
Pull up every account you have that might include a beneficiary designation. That list usually includes every RRSP, every RRIF, every TFSA, every life insurance policy, and every workplace pension plan. Some people also have segregated funds with the same setup.
If you want a structured way to capture all of this in one place, our estate planning worksheet walks you through every account.
For each one, find the most recent beneficiary designation form. Your bank or insurance company can send you a copy if you don’t have one. Read it. Confirm it still says what you want it to say.
Then repeat this review every time something major changes in your life. Marriage. Separation. Divorce. A new child. The death of a named beneficiary. A new job with a new pension.
These are the moments beneficiary forms get forgotten. Every one of them is a moment to check.
Where a Will Still Matters
I’m not telling you your will is unimportant. Far from it. A will still controls your house, your car, your bank accounts that don’t have a joint owner, your investments that aren’t registered, your personal effects, and anything else that doesn’t pass by designation. For many people, that’s most of what they own. If you don’t have a will at all, you can read about what happens when someone dies without one in Ontario.
What I’m telling you is that a will is one piece of a larger plan. The other piece is making sure your beneficiary designations are aligned with your intentions. When those two pieces work together, your estate plan is solid. When they contradict each other, the designations almost always win, and the result can be the opposite of what you wanted.
The Short Version
Your RRSP, your TFSA, your pension, and your life insurance don’t generally pass through your will. They pass through beneficiary designations signed at your bank or insurance company. Those designations stay in place until you change them, even after a divorce, even after a new will (the rare exception is if the will specifically mentions your plan and changes the beneficiary but it raises complex issues), even after the beneficiary has died.
If you’re doing estate planning in Peterborough or the Kawarthas, I’m glad to help. When we review your will together, we will also review every beneficiary designation you’ve signed. Book a consultation and we can make sure the whole plan pulls in the same direction.
Barry W. Bussey is the principal lawyer at Bussey Ainsworth in Peterborough, Ontario. He has practised law for over 30 years and has experience in wills and estates, estate planning, and powers of attorney.
This article is for general information only and does not constitute legal advice. Every estate plan is unique. Please consult with a lawyer before making decisions about beneficiary designations or estate planning.
