Aug 8, 2012
Christine Van Cauwenberghe
Tax & Estates Expert
I became a single parent in October. When naming a beneficiary on insurance and RRSP, should I put my baby's name or the estate? asked by Kyla, EEG tech, Saskatoon, SK
Congratulations on the birth of your child. As for your question, I am actually not a big fan of direct beneficiary designations, particularly when dealing with minors. Here are a few things to consider:
If you name your child as the direct beneficiary of your insurance and RRSP, and your situation later changes, you will need to remember to change your beneficiary designation, which many people forget to do. So, for example, if you have more children, only the child who is designated as the beneficiary on the contract will receive anything, potentially disinheriting other children
If a beneficiary is under the age of majority, they will not be capable of managing the funds, which may mean that the funds will be paid to the Public Trustee or other governmental authority who will then manage the funds until the child becomes an adult, at which point your child will receive a lump sum. In my experience, even age 18 or 19 is too young to receive a large lump sum....and if you die while your child is quite young, the use of the funds could be quite restricted until they become an adult.
I usually recommend that people think twice about appointing a direct beneficiary. Although many people seem to be obsessed with saving probate fees, the amount of the fees is, in reality, quite small. In fact, in Saskatchewan, the fees are .7% of the value of the estate - yes, less than 1%. What is more important is ensuring that your child or children receive the money when they need it, while also ensuring there are proper controls in place. So here is what I would recommend:
•Designate your estate as the beneficiary of your assets.
•Go to an estates lawyer to get a properly drafted will (try and choose a lawyer who has their TEP designation, meaning that they are a member of the Society of Trust and Estate Practitioners and definitely don't try and do it yourself).
•Indicate in your will that any monies left to minors are to be held in trust, and appoint a trusted person such as a brother or sister as the trustee.
•Structure the trust so that the trustee can access the funds while the child is young (for things like education, extra-curriculars, etc.), but only pay out the capital to the child on a staggered basis (i.e. 1/4 of the trust funds at age 21, 1/2 of the reminder at age 25 and all of the remainder at age 30 - use whatever ages and proportions you feel are appropriate).
•Most estates lawyers will draft your will in a manner that would include any children alive at the time of your death, not just those alive at the time you write your will.
If you are really concerned about probate fees, and the amount of your insurance policy is high, then it may be worth the effort to use what is called an "insurance trust" to try and save probate fees on your insurance policy. This is something that your lawyer can explain to you (again, assuming you go to someone who is an expert in the area - research their qualifications carefully before choosing a lawyer).