Revisiting Beneficiary Designations
Avoid the dire consequences of not updating them
by Jamie Golombek
All advisors are certainly well aware that beneficiary designations on various financial products, such as RRSPs, RRIFs, segregated funds or life insurance policies, are an effective way of ensuring investors can transfer their wealth to others after their death in an efficient manner. Naming a beneficiary can also have other benefits, depending on the investor's province, such as the minimization of probate taxes and creditor protection.
Have you taken the time to review your clients' beneficiary designations to ensure that they are still accurate going into 2006? Unfortunately, some advisors take beneficiary designations for granted. An Ontario court decision handed down last year dealt with beneficiary designations and spelled out, in no uncertain terms, the potential dire consequences of failure to update a client's various beneficiary designations.
The case, Gaudio Estate v. Gaudio ( W.D.F.L. 2616, 16 R.F.L. (6th) 72), involved Mr. Francesco Gaudio who designated his wife, Debra Ann Gaudio, as sole beneficiary of his Bank of Nova Scotia RRSP, his group RRSP with Great-West Life and his group life insurance policy with Industrial Alliance (National Life).
On October 15, 2004, the parties separated and Debra signed a separation agreement contracting out of her entitlement to a share of her husband's estate and which purported to "settle all claims between them." On January 10, 2005, Mr. Gaudio died without a will.
Mr. Gaudio, who was never formally divorced and had no children, was survived by his mother and siblings. A dispute arose between Claudio Gaudio (presumably a sibling or other relative), acting on behalf of the estate, and Mrs. Debra Gaudio, the deceased's wife, as to who was entitled to the proceeds of the RRSPs and life insurance policy.
Curiously, the separation agreement between Mr. and Mrs. Gaudio did not specifically revoke neither the designated beneficiary of the insurance policy nor the beneficiaries named on the RRSPs, but rather consisted of "general boilerplate clauses."
In fact, the judge found that there was no evidence whatsoever that the late Mr. Gaudio intended to change the designated beneficiary on his RRSPs or life insurance policy. As the judge said, "The intention of the parties with respect to changing the designated beneficiary to the assets in controversy is unclear and ambivalent."
The Ontario court therefore had to decide what effect, if any, the separation agreement itself had on Mr. Gaudio's RRSPs and life insurance policy. Claudio Gaudio, the estate trustee, argued, among other things, that Mrs. Gaudio "bargained away her entitlement to the assets in controversy and that the separation agreement constituted an instrument of RRSP revocation."
The judge disagreed and found that the covenants in the separation agreement "do not waive or revoke the right of the named beneficiary" to the proceeds of the RRSPs and the insurance policy. In other words, the judge concluded that "it was immaterial whether or not Mr. Gaudio left his insurance policy designation unchanged due to pure error or inadvertence. It was also immaterial whether or not the insured was under the erroneous impression that it was unnecessary for him or her to take any steps to change the designation of the beneficiary."
The judge correctly found that since the monies payable under the RRSPs and the life insurance policy do not form part of the estate, they are not subject to the claims of Mr. Gaudio's surviving relatives. As the judge concluded, "it is not the role of the court to speculate as to what the deceased may have intended to do or may have thought that he had done."
The judge found that Mrs. Gaudio, although separated, was still the legal beneficiary of the RRSPs and life insurance policy and thus she was entitled to the full proceeds of both RRSP accounts and the life policy.
This decision is only the most recent case in a string of decisions in the last number of years dealing with beneficiary designations or lack thereof. For example, in Desharnais v. Toronto Dominion Bank  B.C.J. No. 2633, TD Evergreen was found negligent for failure to advise a client that she was required to name a beneficiary on her new TD Evergreen RRSP, which was transferred from her RRSP at TD Bank.
Similarly, in Bramley v. Bramley Estate  B.C.J. No. 457, a disappointed beneficiary, who was originally named as the beneficiary of an RRSP, sued the estate for the RRIF proceeds upon death because the beneficiary designation was not automatically carried over from the RRSP to the RRIF. He lost.
Unfortunately, the case law dealing with disappointed beneficiaries and advisor negligence is expanding. It's therefore wise to ensure that we regularly communicate with clients, perhaps even in writing, to ensure that their beneficiary designations are up to date.
It's also recommended to follow up on any blank designations, ensuring that the client is aware that the beneficiary designation has been omitted and informing him or her that, in the event of death, the RRSP or RRIF assets will flow directly to the estate and be distributed in accordance with the client's will or, if the client dies intestate, such as in the Gaudio case discussed above, in accordance with the provincial laws governing intestacy.