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This article appears in the February 2022 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

Estate experts are welcoming a Nova Scotia court decision that they say reaffirms the primacy of beneficiary designations.

The decision late last year found that a TFSA belonged to the beneficiary named on the plan rather than to the TFSA holder’s estate.

However, conflicting case law in recent years from Ontario and other provinces continues to create uncertainty. Those rulings found that named beneficiaries are presumed to hold the proceeds of a registered plan in trust for an estate unless they can prove the planholder intended for them to receive the property.

In the absence of a higher court decision, legislation would be needed to clarify that a presumption of resulting trust does not apply to beneficiary designations of registered plans and insurance policies, as it does with jointly held bank accounts. That legislation would have to come at the provincial level.

“A legislative solution would be the quickest way to create certainty on this issue and avoid needless litigation and family disputes,” said Kevin Wark, tax advisor to the Conference for Advanced Life Underwriting (CALU), in an email to Investment Executive (IE).

Fitzgerald vs. Fitzgerald Estate (2021 NSSC), a decision released by the Nova Scotia Supreme Court in December, involved a testator who left his estate to his eight children in equal parts. The testator also died owning a TFSA that named one of his daughters as beneficiary.

The executor, one of the deceased’s sons, brought an application to court arguing that the TFSA belonged to the estate. He relied in part on the 2020 Ontario court decision in Calmusky vs. Calmusky, which found that the principle established under the 2007 Supreme Court of Canada decision Pecore vs. Pecore — that a transfer of property for no consideration to an adult child is presumed to be a trust, unless that presumption can be rebutted by the transferee — applied to a RRIF designation.

In objecting to the application, the beneficiary in Fitzgerald argued that the presumption did not apply to the TFSA and that she had a right to receive the proceeds of the plan under Nova Scotia’s beneficiaries legislation. Her father intended for her to have the TFSA’s proceeds because of their close relationship, she argued.

The court in Fitzgerald took issue with the approach used in Calmusky — the presumption of resulting trust should apply to a beneficiary designation — arguing that “there are significant and distinct differences between joint bank accounts and a beneficiary designation, be it a RIF or a TFSA.”

A TFSA is not held jointly, the court argued, and the proceeds are transferred only at death, not during the transferor’s lifetime. Also, provincial beneficiaries legislation requires that the financial institution holding the plan pay the proceeds to the beneficiary, and entitles the beneficiary to receive them.

“To impose the presumption of resulting trust upon designated beneficiaries of TFSAs would frustrate the clear purpose of the legislature: to simplify the transfer of monetary gifts from the transferor to his/her loved ones,” the court said.

Finally, the court pointed out that the beneficiary doesn’t have access to the funds in a registered plan during the transferor’s lifetime, as they would with a joint account. Further, being named beneficiary doesn’t create a fiduciary relationship with the transferor.

Sanjana Bhatia, director of tax and insurance planning with Sun Life Financial in Waterloo, Ont., said the Fitzgerald decision advances and expands on case law that specifically takes issue with the approach in Calmusky — notably the 2021 Ontario court decision in Mak vs. Mak Estate. Nevertheless, she doesn’t think Fitzgerald will be the last word on this issue.

Bhatia pointed to Simard vs. Simard Estate, a 2021 B.C. case in which the court applied the presumption of resulting trust to beneficiary designations, but with divided results. Where an investment advisor’s notes proved the deceased had intended to gift certain registered accounts to the beneficiary, the court found the presumption rebutted. However, for registered accounts held at other institutions, where only account statements designating the beneficiary were on file, the court found the presumption applied.

Advisors should make notes when a client designates a beneficiary on a plan or policy, Bhatia said, indicating why the client named that person as beneficiary, why they excluded other family members as possible beneficiaries and other relevant circumstances. Copies should be kept on file and given to the beneficiary to keep with their plan or policy.

In response to the Calmusky decision, several industry organizations, including CALU, Advocis, the Canadian Life and Health Insurance Association, the Ontario Bar Association and STEP Canada, asked the Ontario government for legislative amendments to provide that the presumption of a resulting trust does not apply to beneficiary designations.

In an email to IE, Advocis indicated it continues to “favour a solution that addresses this uncertainty and restores longstanding principles in estate planning,” whether through legislative amendments or through a higher court decision that overrules cases such as Calmusky.

As for CALU, it “continues to make representations to the Ontario government with the hope they will take decisive action to deal with this issue,” Wark said.

In an email, the Ontario Ministry of Finance indicated that there had been no developments on the file since last summer, when it told IE it was still reviewing stakeholder proposals.

Matthew Rendely, an estates lawyer and partner with WEL Partners in Toronto, said legislative amendments to Ontario’s Succession Law Reform Act would allow estate planners to provide clients with greater certainty on beneficiary designations. Conflicting case law on the question means planners must contact clients to revisit estate plans as new case law emerges, which may no longer be possible if clients lose capacity.

Bhatia believes that “the beneficiary designation should stand on its own” without reference to a planholder’s intention. “The only time that [a beneficiary designation] could possibly be challenged is if there’s a claim of undue influence.” Legislation to clarify the issue would make challenging designations much tougher for litigants, she added.

Christine Van Cauwenberghe, head of financial planning with IG Wealth Management in Winnipeg, said “[court] decisions regarding beneficiary designations have been all over the map for many, many years.” She often tells clients to avoid naming beneficiaries on plans in favour of dealing with an estate exclusively through a will.

While clients may want to designate beneficiaries on registered plans so that proceeds of the plan do not form part of the estate, thus avoiding probate tax, doing so may lead to unintended estate planning consequences, she said.

Van Cauwenberghe cited a 2021 case in which a Nova Scotia family was left in a difficult spot when a man died suddenly with much of his assets held in an RRSP opened years ago with his mother designated as beneficiary. At his death, the proceeds of the plan were the property of the man’s mother, while the tax bill associated with the RRSP was a liability of the estate.

“In my opinion, [beneficiary designations] have the potential to cause a lot more grief that they’re worth,” said Van Cauwenberghe, allowing that they can make sense for less complicated estates and when clients have insolvency concerns and want to avoid distribution under an estate.

Van Cauwenberghe agreed that clients who do choose to name beneficiaries on plans should revisit estate plans regularly: “Document your intentions so that everyone knows, ‘Yes, I did really mean to [leave the plan] to this child.’”