Guarding beneficiary designations — recent developments

Most advisors are aware of the importance of beneficiary designations when assisting their clients with their financial and estate planning goals. Beneficiary designations can be used for registered accounts as well as insurance products, including segregated fund contracts. The benefits of beneficiary designations are well known; they have been used to bypass the estate, reduce estate administration and probate¹ fees, and get proceeds into the hands of beneficiaries quickly.

However, recent legal challenges raised in Canadian courts² could call into question that named beneficiaries under these designations may hold these proceeds on trust for the benefit of the deceased policyholder’s estate. This article provides a brief summary of some of the jurisprudence as well as tips to help protect your client’s intentions.

In Pecore v Pecore,³ the Supreme Court of Canada dealt with the case of a parent adding an adult child to a bank account as a joint owner. The Court found that, generally, where there is a gratuitous transfer from one party to another, there is a presumption that the recipient holds those funds on a resulting trust for the benefit of the transferor (or their estate if they are deceased).⁴ A different presumption applies for transfers from a parent to a minor child.⁵ As well, for most provinces, gratuitous transfers between spouses will also be subject to the presumption of resulting trust.^6.

Where the presumption of resulting trust applies, the burden is on the transferee (in the Pecore case, the adult child) to provide evidence that the parent intended the transfer to be a gift. The transferee needs to rebut this presumption on a balance of probabilities.

The evidence required to rebut the presumption of resulting trust will differ on a case-by-case basis. For the joint bank account in this case, the Court commented on some types of evidence that the transferee could use to prove the transferor’s intention to gift the joint account proceeds to the adult child:

•  evidence of the transferee parent’s intention at or near the time that the transfer occurred;
• evidence after the transfer occurred;⁷
• bank documents (anything to demonstrate the transferor’s intent on the bank forms);
• control and use of the funds in the joint account;⁸
• whether a power of attorney existed;⁹ and
• tax treatment of the joint account.¹⁰

If the evidence is not sufficient to rebut the presumption of resulting trust, then the transferee will hold the joint account proceeds for the benefit of the deceased’s estate, to be distributed in accordance with the deceased’s will (or pursuant to provincial intestacy legislation if there is no valid will). This makes these proceeds subject to the probate process and applicable probate fees.

The Pecore case dealt with the presumption of resulting trust for inter vivos transfers (e.g. bank accounts). But what about accounts with beneficiary designations that are intended to pass to the beneficiary on the owner’s death? Recent jurisprudence in several provinces suggests that these accounts could also be subject to the presumption of resulting trust in the event of a court challenge. This puts an additional burden on the transferee (the named beneficiary) to prove that the transferor (the deceased) intended to gift the proceeds of these accounts for the transferee’s benefit alone.

In British Columbia, beneficiary designations with an adult as named beneficiary have been presumed to be held on resulting trust in favour of the deceased’s estate,¹¹ which follows earlier Manitoba case law.¹² In Alberta, a 2015 Court of Queens Bench decision implied that the presumption of resulting trust applied to beneficiary designations,¹³ while in Saskatchewan, the Court of Appeal ruled that the presumption of resulting trust does not apply to beneficiary designations.¹⁴

Most recently, in the Ontario case of Calmusky v Calmusky,¹⁵ the Court applied the presumption of resulting trust not only to a joint bank account held by an adult child and his parent, but also to the beneficiary designation in favour of that child with respect to the parent’s registered retirement income fund (RRIF) — not an insurance RRIF. For Ontario, this is a new expanded application of the principles in the Pecore case, which is in line with some of the other provinces mentioned above. Of particular concern is the Court’s view that there is “no principled basis for applying the presumption of resulting trust to the gratuitous transfer of bank accounts into joint names but not applying the same presumption to the RIF beneficiary designation.”¹⁶ While many estate practitioners disagree with this view and industry organizations have already commenced lobbying efforts to push for legislation that specifies that the presumption of resulting trust doesn’t apply to beneficiary designations, unless legislation changes to provide additional protection to these designations, or there is a ruling from the Supreme Court of Canada, the current approach taken by the courts is the one that needs to be planned for.

Remember that the presumption only deals with who has the burden of proof to show the transferor’s/deceased’s intention. If the presumption of resulting trust applies, the burden is on the named beneficiary to show that the proceeds were a gift for their own benefit and not meant for the estate.

Even though there is inconsistency on whether there is a presumption or not, Canadian courts always have the power to impose equitable remedies, such as resulting or constructive trusts, which could result in a beneficiary designation being held for the benefit of the deceased’s estate and not the named beneficiary.

Advisors should, therefore, be aware of possibility that beneficiary designations can be challenged in court and help their clients to prepare for this possibility.

First, advisors must clearly explain the purpose of the beneficiary designation to their client/planholder and make sure that the client intends the proceeds to only benefit the named beneficiary. Additionally, advisors need to explain the tax consequences of a named beneficiary receiving the proceeds and the potential for the estate to bare the associated tax liability.

Second, advisors can recommend that the client prepare a letter of intent (“LOI”), at or near the time the beneficiary designation is completed, that spells out why they have made this designation and why they intend for the proceeds to go to this named beneficiary. Among other things, the LOI could specifically state that there is no intention to create a resulting trust and that the true beneficial interest in the proceeds are intended to pass to the named beneficiary outside of the estate. For additional protection, the LOI should be witnessed, ideally by two adults, who should not be the named beneficiary or a spouse of that beneficiary. Further, these suggestions should be applied for each beneficiary designation and not generally for all beneficiary designations. Ideally, the LOI will also specify that the client has considered the tax liability stemming from the transfer that occurs on their death.¹⁷

As there are no hard and fast rules regarding LOIs and what they should look like, advisors should recommend that clients prepare any LOI with the assistance of legal counsel that has expertise in estate planning; otherwise, clients could trigger unintended consequences.¹⁸ The importance of an LOI will be influenced by the risk associated with the designation. As an example, a designation that is in favour of only one child and potentially disinherits other children, or is a departure from the residual provisions of the policyholder’s will, is likely going to have a higher risk of a court challenge and will require greater safeguards to protect.

Third, advisors can recommend that the client/planholder has simultaneous discussions with their family members and other estate beneficiaries about the existence and purpose of the beneficiary designation and the estate plan generally, as these discussions could be used as corroborating evidence of intention.

Finally, advisors’ notes from the client meeting where the beneficiary is designated could also be used in a court proceeding as corroborating evidence of the client’s intention. Advisors should prepare detailed notes of these meetings and include the reason for the client’s designation as well as the parties that were present and involved in the discussion.

These steps are especially important as a beneficiary designation form itself may be insufficient to demonstrate the client/planholder’s intention. In the Calmusky case, the Court did not consider the beneficiary designation form to be detailed enough to provide reliable evidence of the planholder’s intent. Likewise, the financial representative’s recollection of her meeting with the planholder was limited. If the financial representative had detailed notes, as well as other things like those described above, that may have provided sufficient corroborating evidence of the planholder’s intent and rebutted the presumption of resulting trust.

The jurisprudence surrounding the application of the presumption of resulting trust to beneficiary designations is evolving and will likely be subject to further discussion by the courts going forward. Advisors can help prepare their clients for the potential of legal challenges to their designations and take steps to help mitigate the risk of their clients’ intentions being challenged in court.

These columns are current as of the time of writing, but are not updated for subsequent changes in legislation unless specifically noted.