Estate Planning

Estate Planning: Proper Documentation Is Critical

Proper documentation can help protect your intent of beneficiary designations

In early 2020, the Ontario Superior Court made a decision that has increasingly been a focus of attention: Calmusky v. Calmusky.

In that case, the entitlement of a named beneficiary to receive the proceeds of a Registered Income Fund (RIF) was challenged. The designation had been made in favour of an adult child, one of the sons of the deceased RIF owner. There was no obvious “price paid” by the son for his father’s having designated him as the beneficiary. The court decided, in those circumstances, there was a legal presumption that the beneficiary received the death benefit on the basis of a “resulting trust” — that is, in trust for the estate. In other words, it was not money for the son to keep personally but rather it was to be handed over to the estate, unless he could prove to the court that his father intended for him to have the money as his own. He was unable to do so. And so, the court ruled that the death benefit was estate property.

The court’s holding, in the Calmusky decision, that a presumption of a “resulting trust” should be applied on the facts of that case, for the benefit of the estate, runs against what is generally accepted by estate planning lawyers and those practicing in the area of insurance and pension law. For them, unless a designator specifies that the beneficiary is to hold the proceeds for an estate or for someone else, the proceeds are for the beneficiary to keep. Note that in Calmusky the beneficiary was an adult, and it was key to the decision that the designation was made for no consideration (e.g., the beneficiary did not in any way ”pay” to become the beneficiary, or was not somehow ”owed”). The presumption of a resulting trust will not be made if the beneficiary is a minor.

The approach taken by the court in Calmusky applies, in principle, to more than just RIF designations, and so would include traditional life insurance. The court’s approach would also apply to more than just so-called ”two-party” contracts, where the product owner is also the life insured. In the case of a ”three-party” contract, where the life insured is someone other than the owner, the beneficiary would hold the proceeds payable on death in trust for the owner. Again, we are considering an adult beneficiary who had not ”paid for” or somehow had “earned” the beneficiary designation.

In response to Calmusky, industry and professional associations have made their concerns known to Ontario, calling for a legislative fix. To date and to our knowledge, no other court in Ontario has followed the Calmusky approach. But for the time being, the prospect that another court might cite Calmusky and rule accordingly does remain a possibility. That court could be outside of Ontario, in some other common-law province or territory (not including Quebec). Already, in certain provinces, there is “Calmusky thinking”.

Preventative measures you should take:

• Properly document your intentions to make a gift, if such is the case, when designating a beneficiary (especially when designating an adult beneficiary, ”for free”, even if that beneficiary is your spouse; the rules around gifts to spouses and whether any presumptions apply can be complex, and can vary by jurisdiction — it is safer to treat a spouse like any other adult beneficiary).
• This documentation would provide evidence to overcome any presumption the beneficiary was intended to hold the death benefit for an estate, or for someone other than the beneficiary personally.
• Keep a copy of the documentation with your policy and/or your will.
• Make your family members aware of your estate plans and how you intend to distribute your assets.
• When designating a beneficiary for your assets, be aware of possible tax implications for your estate and obtain appropriate professional advice as part of your tax and estate planning.
• Otherwise, if tax liability issues have not been addressed, a court in any particular case might find it equitable to draw back at least a portion of the registered assets into the estate, to cover any associated tax liability.
• Review your designations, make any necessary changes, properly document and provide explanatory notes.

Implementing the above measures can help ensure that your wishes are carried out as intended. Need help? Please contact me.

A well-designed Estate Plan, in conjunction with an RTO plan, will reduce your tax obligations throughout the rest of your life — and beyond — keeping more available for you to utilize during your lifetime and reducing the estate’s losses to taxes and fees upon your death.

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For a no-cost preliminary consultation to determine what would be involved with reducing or eliminating your estate’s exposure to litigation, probate, the Estate Administration Tax, and other probate fees, contact me. I specialize in Estate Planning and Retirement Planning and offer financial planning services across Ontario. My office is in Kingston, Ontario, and I am happy to speak with anyone on the phone, or meet in person with anyone in the surrounding area.

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The information provided is based on current tax legislation and interpretations for Canadian residents and is accurate to the best of our knowledge as of January 2021. Future changes to tax legislation and interpretations may affect this information. This information is general in nature, and is not intended to be legal or tax advice. For specific situations, you should consult the appropriate professional advisor.