Planning with life insurance

The Insurance Act allows for direct payment of the proceeds of an insurance policy on your life to a named beneficiary upon your death. Insurance designations can be made either by naming a beneficiary on the policy, or in your will. As long as there is a named beneficiary (who, in the case of an individual, is still alive at the time you die), the insurance proceeds are excluded from the value of your estate. In addition to insurance policies, you can name beneficiaries on registered pensions, RRSP and RRIF accounts in most provinces, as allowed by provincial laws.

If you name a beneficiary on an insurance policy, pension, annuity or segregated fund and your intended beneficiary dies before you do, unless you have named an alternate beneficiary the value of the designated asset must be included in your estate. It is then subject to estate administration tax. You can name more than one beneficiary on a plan, in which case the proceeds would be shared equally among all beneficiaries, or paid to the beneficiaries who are alive at the time of your death. Many companies also allow you to name a first choice of beneficiary called primary and to also name a beneficiary who will only receive the proceeds if the primary beneficiary predeceases you. The beneficiary in this case is called an alternate or contingent. If you want more control over the distribution of the proceeds, you can arrange for the proceeds to be paid into your estate and dealt with according to instructions in your will. In that case, the proceeds would be subject to estate administration tax.

Another option is to set up an insurance trust to receive life insurance proceeds on behalf of your beneficiaries. This type of formal trust is most often created by a declaration in your will, but because the insurance policy pays directly to the trustee you named in your will, and he or she immediately deposits the money into the trust account, the proceeds are not considered to be part of the estate for estate administration tax purposes.

There are other factors that you should consider in conjunction with naming beneficiaries to minimize or avoid estate administration tax. These issues include making sure there is enough cash or easily cashable assets in your estate to pay income or capital gains taxes. There are also family law and inheritance issues. The cost of ignoring general estate planning issues may be greater than the estate administration taxes saved.

Joint Ownership

A commonly used method to avoid estate administration tax on death is to hold property as joint tenants with right of survivorship (not available in Quebec). Jointly held property passes automatically, by operation of law, to the surviving joint owner or owners and therefore does not form part of the estate and is not subject to estate administration tax.