Jerry and Carol thought a vacation away together would solve all their problems. Recently it seemed that all they were doing was fighting; whether it was arguing about their retirement, when and how to downsize and even little things like where to go for dinner. When they did agree on a restaurant, they had little to say to each other. Everything seemed forced and strained. However, after a trip to Hawaii, their relationship was no better off. In fact, it was worse. All it did was bring to the forefront how much they had grown apart. It was time to move on.
Carol was the first to file for a divorce. She wanted to make sure that legally she was not responsible for any of Jerry’s debt going forward. As for Jerry, he moved out of the family home into a one-bedroom apartment to figure out his next move.
Three months later, Jerry ran into an old high school friend at a high school reunion. She was recently divorced, and they discovered they had a lot in common. Within three months he had moved into her house and living in new found bliss. Fast forward 14 months and Jerry passed away unexpectedly due to a car accident.
With 50% of marriages ending in divorce or separation, this scenario is not uncommon. Unfortunately, while Jerry may have found another partner and living in bliss, he forgot to review his beneficiary designations on his financial assets. A very costly mistake. Jerry’s RRSP worth $950,000, his $500,000 life insurance policy and his TFSA worth $55,000 went straight to Carol. Why? A Beneficiary Designation form will trump an estate plan every time.
When should you review your Beneficiary Information?
Beneficiary forms and designations should be reviewed after marriage or divorce of the account holder. Family births and deaths along with other major life events are also another great time for a review. Ideally, every three to five years is a good time to double check your beneficiary designations.
Reasons for This Lapse
· People think that a will supersedes a Designation of Beneficiary form. Not so.
· People assume that it is the role of their plan administrator. Many plan documents already have this form filled out. Plan Administrators can make mistakes so it’s up to the client holder to make sure the beneficiary information is accurate and up to date. Read every form thoroughly before signing. You don’t want your assets going to your estate if that’s not what you want.
· You change financial institutions and the delivery institution fails to pass along the beneficiary information.
· People think it’s a daunting and time-consuming process. It’s a simple matter of filling out and signing a form. It’s also easy to add more than one beneficiary. Certain types of accounts like a LIF may require an ex-spouse’s signature; depending on the legislation.
· People will ‘get around to it later’. For Jerry, later never came.
Reasons to keep your Beneficiary Information Up to Date
· Your estate may pass onto someone in error; like an ex-spouse.
· If your beneficiary pre-deceases you, your assets may pass to your estate and need to go through the probate process which could be long and time consuming. Also, the estate may be forced to make withdrawals to pay for taxes and other financial obligations; diminishing the value.
· Family dynamics change along with their financial situations. If a minor is the designated beneficiary, a trust may be required.
What assets should you review?
· Registered Plans (RRSPs, RIFs, LIFs, etc.)
· Bank Accounts (individual and joint)
· Insurance policies (mortgage, CI and life)
· Employer Group Plans
· Educations Plans like an RESP
· Wills/Power of Attorney (POA)/Representation Agreements
Annual reviews with your financial planner are important to review any changes to your accounts, including beneficiary designations; both revocable or irrevocable. People like Jerry who forget to make this change risk making potentially costly estate planning mistakes. Jerry’s new partner won’t see a penny of his money. While Jerry was happily moving on with his life, he unwittingly ended up giving his ex-spouse $1.5 million. Had he kept up regular meetings with his financial planner and kept copies of his forms, his ex-spouse may not be partying on a yacht in the Caribbean.