Your will does not determine who receives your investments

Q: Ed, I have a very specific and detailed question about a will. Which document takes precedence over the other? A will written/made in March 2016 which states: I give, determine and bequeath all the property of my estate, both real and personal, of every kind and situation, including all property over which I have general power of appointment to my Trustee on the following terms:

• To divide among my four nieces (names given in the will) my personal, household and household items or ornaments.
• Pay or donate the amount of $x, xxx,xx to each of 3 friends (names provided in the will)
• Divide the remainder of my estate into equal shares and pay or give one (1) such equal shares to each of my four nieces (names provided in the will).

(NOTE: specific assets are NOT identified/mentioned in the will)

OR

Beneficiary designation form submitted to the investment company when opening an investment account in April 2012, if the only named beneficiary is one of the three friends named in (item two above) the will?

—Luis from Milton, Ont.

AND: Luis, your question raises conflicts between wills and estates with designated beneficiaries. The last dated and valid beneficiary designation usually applies.

Designated assets are not usually controlled by wills. They pass to beneficiaries outside the will.

We understand how assets and designated assets will differ.

What are designated assets?

Designated assets are usually controlled by contract. When you buy life insurance, you sign a contract. You tell the insurance company who to pay your insurance money to after your death. This is your designated beneficiary. Some insurance products, such as segregated funds, may also have designated beneficiaries.

You can also designate beneficiaries for registered retirement plans and tax-free savings accounts. It’s easier to change your designated beneficiaries than it is to change your will.

Assets with designated beneficiaries

You can receive a pension benefit. If there is no statutory requirement to leave it to your spouse, you have options. You can designate benefits to be paid to third parties, such as family members.

If you choose your estate as your designated beneficiary, then the estate will be controlled by your will. Your executor then collects the proceeds only after all debts and income tax have been paid. Assets are distributed according to your will.

Typically, a will does not include assets that have designated beneficiaries. There are several reasons for this. Here’s an example with a $300,000 life insurance policy.

If this policy is intended for specific individuals, payment is often made within 30 days of death. This is important if beneficiaries need money to cover living costs.

Life insurance beneficiaries

What happens if your estate pays out $300,000 in life insurance? It is then subject to provincial inheritance taxes and creditor claims. Not to mention the delays as the will review can take anywhere from 8 to 12 weeks.

In Ontario, inheritance tax on an amount of $300,000 is approximately $4,500 plus legal fees for the lawyer. If the investment is payable to the estate, it is subject to the claims of creditors. If the insurance is payable to a designated person, the policy proceeds are safe.

Designated assets are not controlled by the will unless you (a) designate your estate as a beneficiary or (b) establish that the asset is held in trust as part of the estate.

The terms of the investment agreement should be verified. My answer to this question may be different.

The person designated as beneficiary of the investment account may have further problems. This person can hold the investment on fiduciary terms. They may have to share the gift with the people named in the will. Trust terms, if any, should be considered.

I always advise clients to keep their designated beneficiaries informed. People entering into separation or divorce agreements need designated beneficiaries to be tax efficient.

Ed Olkovich is a Toronto lawyer and certified specialist in real estate and trusts law

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