Discover the Advantages of Designated Assets When You Make Your Last Will

Making Wills Easy – New Summer Series 10

You now know the secret to giving away your stuff from my last post.

Now let me explain the benefits of designated assets.

When you bought life insurance, you designated who benefits from your policy. You probably wrote down your spouse or a relative as “designated beneficiary.” Your life insurance, pension plans and registered investments allow you to designate beneficiaries by contract or statute. Designated beneficiaries inherit these assets on your death without wills. Properly designated assets are not subject to probate tax either.

Yes, that is a bonus.

Some Designations are Mandatory

You need to know how to designate assets in your estate pie.

Your spouse may be required to be your designated beneficiary of your pension. You can’t leave statutory controlled pension benefits to your grandchildren in wills. But you can designate who gets your tax-free savings accounts.

What If You Forget to Designate Your Stuff?

If you fail to designate beneficiaries for these assets, they fall into your estate and become “will assets” by default. Will assets are then subject to probate tax and dealt with by your will.

Designated beneficiaries receive benefits without complicated legal procedures. Usually, they can satisfy formalities and collect life insurance proceeds quickly. They only need to produce a death certificate and fill out forms to receive benefits within weeks of someone passing.

Don’t forget to take advantage of this technique of designating assets. It will help make your estate planning quick, easy and effective.

How Designating Assets Works

Moira wants her adult daughter, Nicole, to get her life insurance benefits. She designated Nicole as her beneficiary on the policy through her life insurance broker. In the event of Moira’s death, her life insurance proceeds will pass to Nicole outside Moira’s will and without probate tax.

Does Moira have to deal with the policy in her will? No. However, the designation needs to be kept current by Moira. She may update her designated beneficiary in case Nicole passes away first.

What if Nicole is a minor when Moira dies?

In this case, the life insurance proceeds would be paid into court for Nichole. However, unless the insurance is mentioned and controlled by Moira’s will, Moira can have life insurance controlled by her executor by making the policy payable to her estate. Moira’s executor would then deal with insurance proceeds according to her will.

Who Should be Designated as Beneficiary?

As a general rule, you want to designate your adult beneficiaries. They will inherit any designated assets in your estate pie. Upon your death, these assets go directly by contract or statute to your beneficiaries without passing through probate. This saves time, money and expense.

For tax reasons, you may want to designate qualifying spouses as beneficiaries for designated assets with income tax consequences. These are typically your RRSP and RRIF.

Some assets can qualify for tax-free rollovers to your qualifying spouse. This is an important income tax advantage. You do not want any potential creditors to make claims to insurance money if these go into your joint estate.

In blended families, you can ensure your children receive some benefit from your estate. This is a complex tax issue and you will need legal advice to make this decision.

What If You Are Single?

You may wish to leave your life insurance proceeds to charity, or you can designate your estate itself as beneficiary. Normally, before doing this, you would get advice on the best way to designate assets.

If you have multiple beneficiaries, you are better off dividing designated assets among them equally by your will. It is not practical to put all of your beneficiaries on every designated asset.

Here’s what I mean. Janina put Alexa and Sandra’s names on her bank account. But she only put Alexa on her $100,000 investment account. To fix this, she put Sandra on title to her pension. She thinks that is alright. However, each different asset has different values and tax consequences.

You can deal with the contingency of beneficiaries dying before you. Your will is the place to deal with these risks.

Changing Beneficiaries is Easier Than Changing Your Will

You can easily change your life insurance designated beneficiaries without a lawyer’s help.

When your children are young, your plan may be to use insurance to support their needs. You can designate these proceeds to go to their other parent or guardians.

You will not pay a lawyer to change your will if you can keep designated assets out of your will.

Are there exceptions to this designation rule? Yes, if you have a million-dollar life insurance policy. You may want to control how this benefit is used. Your will can deal with this by setting up a trust. I’ll cover trusts in future posts.

Need help making your will? Contact me for a will appointment.