Like many teenage boys, my favourite coming of age experience upon entering high school was shop class. After a childhood spent watching my father use power tools, I was finally going to learn to use them myself!
It wasn’t as easy as that, though. We spent a number of classes carefully studying their features, benefits and dangers inside and out before we were able to use them safely, always under the watchful eye of our shop teacher.
Financial and estate planning tools are no different. We need to understand them and work with our advisors to make sure we build and transfer our wealth effectively, and not hurt ourselves or others in the process.
The beneficiary designation is such a tool and can be used with life insurance, insurance company segregated funds, and various annuity contracts. Beneficiary designations can, of course, be appointed on all registered plans such as RRSPs, RRIFs, TFSAs, etc.
By appointing beneficiaries, we can assure that many of our financial assets transfer smoothly to our loved ones, favourite charities or to other relationships such as corporations or trusts without expensive probate or legal costs.
We can also appoint contingent beneficiaries. For example, John and Mary appoint each other as primary beneficiaries on each other’s’ RRSPs and TFSAs, as well as their life insurance policies. They are concerned that these funds will get tied up in the estate and subject to probate fees so they decide to appoint their two adult children as equal beneficiaries should John and Mary both pre-decease them.
The use of contingent beneficiaries is not often discussed when setting up your accounts or insurance policies, especially if you are dealing in a transactional rather than an advisory relationship. If you would like a sample beneficiary letter of direction, including contingent beneficiary wording, feel free to send a quick email to [email protected].
Remember the power tools? Your estate plan can go horribly wrong if you neglect to review it periodically and through your various life changes such as marital status, births, deaths, etc.
For example, newlywed couples often still have their parents as beneficiaries on their insurance policies and RRSPs. Worse yet is the case of the newly married husband who still has his old girlfriend listed!
Minor children are not legally able to accept funds, so you need to exercise caution here and use a trustee, preferably through a formal trust or through the use of a trust declaration. The same goes for naming a spendthrift beneficiary or beneficiaries with special needs. These situations should be coordinated with your advisory team.
Planning your estate without qualified advice is very much like letting a bunch of teenagers loose with a room full of power tools! Don’t do it alone.
The opinions expressed are those of Richard Vetter, BA, CFP, CLU, ChFC. Richard is a certified financial planner and owner of WealthSmart Financial Group in Richmond, BC, www.wealthsmart.ca
