Designating a beneficiary is one of the most important aspects of estate planning. In fact, it can have significant consequences for individuals and their loved ones. Why is that? 

Let’s explore the beneficiary concept using five key ideas. 

1. What does it mean to “designate a beneficiary”? 

Designating one or more beneficiaries means specifying, in a document with legal standing, the person(s) who will receive the “benefit” of your property (including real property, such as land and buildings, and personal property, such as money, investments, personal belongings, etc.) after your death. Naming a beneficiary is the safest way to ensure that your possessions will be distributed according to your wishes. 

As this designation has legal consequences, it’s important to note that there may be rules specific to your province to be aware of. As a result, obtaining informed advice is recommended, rather than relying on sources of information that might not apply in your province. 

2. How do you designate a beneficiary and what are the advantages? 

Typically, a will is used to designate the beneficiary(ies) of your estate, and includes details about how you wish your estate to be managed or passed on to these beneficiaries. However, beneficiaries can also be designated within certain financial products offered by insurance companies, such as insurance policies, annuity contracts and guaranteed investment funds (also called segregated funds): this designation can be made during the application process or updated at any time prior to the owner’s death (insofar as the owner continues to have mental capacity). Naming a beneficiary other than the estate directly on the insurance policy may result in the proceeds being paid directly to the named beneficiaries outside of the estate settlement process, allowing the beneficiaries to collect the full amount and to receive it more quickly. In addition, benefits paid to a named beneficiary of a financial product might not be subject to probate fees in provinces where such fees apply during the settlement process. Under certain conditions, designating a beneficiary within an insurance product could also provide creditor protection. 

Beneficiaries can also be designated for registered plans, such as a registered retirement savings plan (RRSP), registered retirement income fund (RRIF) or tax-free savings account (TFSA). However, conditions may apply, depending on the province. 

Note that being able to designate beneficiaries in both your will and a contract for an insurance or certain financial products could create some special issues at death, especially if the designations are in conflict with each other. Also, depending on the province, there may be probate fee implications associated with naming the estate as the beneficiary. These factors and others should be considered when determining which beneficiary designation method is best for your personal situation.  

3. Who can be a beneficiary? 

Generally, the beneficiary for an insurance policy or an eligible financial product is named by the owner of the policy or investments. In some cases, the beneficiary designation might be automatic and out of your control, such as with mortgage insurance offered through a bank, where the beneficiary is the mortgage holder (i.e., the bank). Most often, though, a beneficiary would be an adult who is close to you. If you choose a minor as your beneficiary, you should also ensure that a trustee is assigned in case you pass away before the beneficiary is of legal age. You can also designate your estate as beneficiary or, under certain conditions, an eligible charity (which could offer some tax advantages). Note that some financial product issuers require that you and your beneficiary have a “significant relationship” or shared interest, the latter applying most often in business insurance strategies. This is sometimes also referred to as “insurable interest,” as it pertains to insurance polices. 

4. Are there different types of beneficiaries? 

There are different types of beneficiaries, and the terms used to distinguish them may vary depending on the applicable legislation. It is generally a good idea to designate a “principal” beneficiary and a “secondary”, “alternate” or “contingent” beneficiary, in case the person named as the principal beneficiary dies before you do. 

A beneficiary can also be revocable or irrevocable. This distinction is very important: while the owner of a policy or investment can change a revocable beneficiary whenever they wish, an irrevocable beneficiary designation can only be changed with the beneficiary’s consent. That said, it is important to reiterate that the legal provisions for beneficiary designation may vary depending on the applicable provincial legislation. For example, in the province of Quebec, designating your married or civil-union spouse is automatically irrevocable, unless you specify that the designation is revocable.  

5. What could happen if you don’t name a beneficiary? 

There are a number of specific instances where an ill-advised designation could have undesirable consequences. The most striking example is when no beneficiary is named at all on an insurance product (we assume here that the policy owner and life insured are the same person). 

In this case, all assets, including insurance policies, must be included in the policy owner’s estate, which might not have been their wish or intention. The result is that the proceeds would potentially be subject to any creditor of the estate, and would also be subject to probate, where applicable. These scenarios could result in beneficiaries receiving less than intended, or even nothing if the estate is deeply in debt. Proper designation of beneficiaries under the insurance policy could help avoid this scenario. 

A good reason – among many others – why you may wish to designate beneficiaries with careful thought and consideration, and review your designations regularly.