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An advisor's guide to beneficiary designations

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An advisor's guide to beneficiary designations Powered By Docstoc
					An advisor’s guide to beneficiary
designations




                     The Tax & Estate Planning Group
                                                                                                                            A few things to consider
                                                                                                                            before we start …
                                                                                                                            ✓ This Guide provides an overview of beneficiary designations and the associated issues only. Because of
                                                                                                                               the complexity of the subject, you may want to consult other resources, such as Manulife’s Tax & Estate
                                                                                                                               Planning Group’s Insurance Trust Guide, located under the Library tab on the Tax & Estate Planning
                                                                                                                               Group’s website at www.manulife.com/canada/tep. The Insurance Trust Guide will be particularly helpful
                                                                                                                               if you want to review references in this Guide to trust documents or designations in a Will.

                                                                                                                            ✓ References in this Guide generally relate to Ontario legislation. You will need to cross-reference your
                                                                                                                               province’s legislation against the information provided in this Guide.

                                                                                                                            ✓ Any reference to designation in this guide will include a declaration – see Checklist of terms
                                                                                                                               on page 10.

                                                                                                                            ✓ It is important to remember that most provincial Insurance Acts require the policy owner or his/her
                                                                                                                               representative to provide the insurer with notice of a beneficiary designation. For more details, see
                                                                                                                               “Notice” in Checklist of terms on page 10.

                                                                                                                            ✓ The information in this Guide does not apply to beneficiary designations for critical illness policies issued
                                                                                                                               in Quebec.



                                                                                                                            It’s important to ask the right questions now
    An advisor’s guide to beneficiary designations                                                                          By asking the right questions now and setting up clear lines of communication between you and your
                                                                                                                            client’s other advisors, you will help ensure that your client’s wishes are met when it’s time for the
                                                                                                                            beneficiary to make a claim.


           Purchasing life insurance is one of the most important financial decisions your client will ever make. But
           purchasing the life insurance policy is only the first step in protecting your client’s loved ones or business       Here are some questions you and your client need to consider:
           interests. It’s equally important to make sure that when the policy’s death benefit is paid, it will reach the
           people your client intended to protect.                                                                              ✓ Does the current beneficiary designation still reflect your client’s situation and wishes? For
                                                                                                                                    example, has his or her marriage status changed or has a death occurred that would affect the
           Unfortunately, beneficiary designations can be complicated. While it seems like it should be relatively simple           current designation?
           to leave life insurance proceeds to the people your client has chosen, it’s not always easy to predict the
           outcome of a particular beneficiary designation.                                                                     ✓ As we’ve indicated in this Guide, it’s often very important that the insurance advisor and the
                                                                                                                                    professional advisor work together on behalf of their mutual client. Are they aware of each
           How can you make sure you’re giving your clients the best advice when it comes to designating a                          other and do they know how to contact one another?
           beneficiary? As a general rule, all beneficiary designations should clearly identify the beneficiaries and the
           insurance policy in question. Any ambiguity could result in unplanned results such as delays, increased cost         ✓ Are the lawyer and the insurance advisor aware of the current designation?
           to the estate, or disputes over who is entitled to receive the proceeds.                                             ✓ Do the lawyer and the insurance advisor know they should be communicating over any
           This Guide, in an easy-to-use table format, is a tool to help you work with your clients to set up the                   changes that would affect the existing designation?
           beneficiary designation for their policy. Designed for both insurance advisors and professionals, such as            ✓ If applicable, can the insurance advisor and the lawyer disclose documents about the
           lawyers and accountants, the Guide explores the issues, possible outcomes and alternatives associated with               designation to one another to ensure the proper documents are filed with the insurer? For
           different beneficiary designations. It helps you analyze the best options to ensure the proceeds of your                 example, the lawyer would provide the trust document to the insurance advisor who, in turn,
           client’s policy will be paid according to his or her wishes.                                                             would provide it to the insurer.




2                                                                                                                                                                                                                                             3
    Beneficiary Designation Table


    The designation, including:                                    Issues with the designation & questions                            What could happen when it’s time                                      Alternative solutions
    ✓ a specific example of a designation or                       to consider                                                        to pay the proceeds

    ✓ a description of a scenario


    “To my daughter, Susie Doe”                                    •   S. 220(1) of the Ontario Insurance Act says insurer must       •   Insurer must pay into court                                       •   Formal trust agreement with formal terms
                                                                       pay into court – payment cannot be made to a minor
    –   Susie is a minor                                                                                                              •   Court appointed Guardian or Public Trustee will make              •   Declaration in Will with formal trust terms
                                                                   •   Will need court-appointed Guardian of Property for minor           application to court for payment of proceeds out of court
                                                                                                                                                                                                            •   Change designation in policy so it refers to the formal trust
                                                                       or Public Trustee will be involved
                                                                                                                                      •   Delays and additional costs                                           agreement or declaration in Will

                                                                                                                                                                                                            •   Complete a designation form with insurer with name of trustee
                                                                                                                                                                                                                and name of trust and date

                                                                                                                                                                                                            •   Trust terms must be contained in a formal trust agreement

                                                                                                                                                                                                            •   Name a trustee in the application or a separate declaration



    “To my daughter, Mary Sue Doe”                                 •   Payment cannot be made to a person judged incompetent          •   Insurer may pay proceeds into court                               •   Create a discretionary trust either in a formal trust agreement
                                                                                                                                                                                                                or through Will (also known as “Henson Trust” – see page
    –   Mary Sue has been determined to be incompetent to manage   •   Disabled individual may lose government benefits if proceeds   •   Interested parties apply to court to be appointed Guardian
                                                                                                                                                                                                                11 for explanation)
        her financial affairs                                          received                                                           of Property or, if no one applies, the Public Trustee’s Office
                                                                                                                                          appoints a Guardian                                               •   Advise insurer that Henson Trust exists by filing beneficiary
                                                                   •   In absence of formal trust, Guardian of Property or Public
                                                                                                                                                                                                                designation form with name of Trustee plus name and date
                                                                       Trustee appointed by court to deal with proceeds               •   Delays and additional costs
                                                                                                                                                                                                                of trust




    “To my daughter, Jane Doe”                                     •   Minor cannot consent to policy change                          •   Insurer cannot take instructions regarding policy changes until   •   Formal trust agreement naming a trustee with powers
                                                                                                                                          minor is age of majority or guardian is appointed by court            and obligations
    –   Designation is irrevocable                                 •   Policy is frozen until minor attains age of majority

    –   Jane is a minor                                            •   Court-appointed Guardian of Property for the minor would
                                                                       be required to deal with policy




    “To my children”                                               •   Insurer may not know which children to pay                     •   If uncertain who to pay, insurer may apply to pay into court      •   Include each child’s full name in designation
                                                                                                                                          resulting in extra cost and delay
                                                                   •   Should adopted children, step children or children                                                                                   •   If your client intends to include future children, cover this in
                                                                       out-of-wedlock be included?                                    •   Insurer will need affidavit and indemnification signed by all         the designation. Sample wording: “and any future biological
                                                                                                                                          children confirming each child’s right to the proceeds                or legally adopted children of John and Jane Doe”
                                                                   •   Should future children be included?




4
    Beneficiary Designation Table

    The designation, including:                                        Issues with the designation & questions                              What could happen when it’s time                                    Alternative solutions
    ✓ a specific example of a designation or                           to consider                                                          to pay the proceeds

    ✓ a description of a scenario

    Designation needs to be structured so the insurance                •   Does your client want to avoid involvement of former spouse?     •   Former spouse may be involved if designation unclear            •   Create a separate insurance trust fund
    proceeds fulfill support obligations for minor children as
                                                                       •   Is the designation structured properly to meet support           •   Litigation may result if support obligation is not achieved     •   Insurance trust can only be created if structured in accordance
    required under a separation agreement or court order
                                                                           obligation and benefit children as required by the separation        through designation                                                 with the separation agreement or court order
                                                                           agreement or court order?
                                                                                                                                                                                                                •   Name third party or executors/trustees of Will as trustee of
                                                                                                                                                                                                                    insurance trust. Sample wording on page 12




    “To my spouse, John Doe”                                           •   Which designation was the intended result?                       •   Insurer may pay wrong party because it was not notified of      •   Lawyer and insurance advisor work together to ensure any new
                                                                           (The later declaration will take precedence)                         later declaration                                                   declaration is truly intended
    –   Original designation
                                                                       •   Is insurer aware of later declaration in Will?                   •   Insurer pays son after receiving notice of later declaration    •   Provide insurer with notice of later declaration
    “To my son, John Doe, Jr.”
                                                                                                                                            •   If litigation results, insurer pays into court and payment is
    –   Later declaration made in Will
                                                                                                                                                delayed until outcome of litigation is determined
    (For additional information, see the Insurance Trust Guide)




    “To my spouse”                                                     •   Spouse not identified by name                                    •   Insurer uncertain which party to pay so pays into court         •   Specifically name intended spouse or complete change of
                                                                                                                                                                                                                    beneficiary designation
                                                                           –   could create uncertainty as to who to pay if policy owner    •   Insurer may pay wrong party because it’s unaware of
                                                                               is separated from spouse and residing with common-law            common-law spouse or marriage breakdown                         •   Insurance advisor and lawyer communicate with each other
                                                                               spouse                                                                                                                               about spousal change to ensure designation meets new
                                                                                                                                                                                                                    situation




    “To Jane Doe”                                                      •   How will consent be obtained to deal with policy transactions?   •   Insurer cannot act on any instruction until the power of        •   Where possible, power of attorney document grants powers to
                                                                                                                                                attorney is validated or the Committee provides instructions        attorney to deal with policy transactions
    –   Designation is irrevocable                                     •   Policy is frozen until the power of attorney document can be
                                                                           produced and determined valid; or a representative
    –   Jane Doe is no longer competent to provide consent regarding
                                                                           (Committee) is appointed by court to instruct insurer
        policy transactions




5
    Beneficiary Designation Table


    The designation, including:                                            Issues with the designation & questions                                 What could happen when it’s time                                       Alternative solutions
    ✓ a specific example of a designation or                               to consider                                                             to pay the proceeds

    ✓ a description of a scenario

    “In trust for Paul Doe”                                                •   Does a true trust exist?                                            •   Trustee appointed by court if no formal agreement or               •   Formal trust agreement with formal terms
                                                                                                                                                       declaration naming Trustee exists
                                                                           •   Who is the Trustee?                                                                                                                        –   file a copy with the insurer
                                                                                                                                                   •   Payment to Trustee
                                                                           •   Who will the proceeds be paid to?                                                                                                          •   Declaration in a Will with formal trust terms
                                                                                                                                                   •   At age of majority (usually age 18), beneficiary can pursue full
                                                                           •   If the beneficiary of the trust is a minor, full proceeds will be                                                                              –    file a copy with the insurer
                                                                                                                                                       proceeds from Trustee – litigation may result
                                                                               paid by the Trustee to the beneficiary only at age of majority
                                                                                                                                                                                                                          •   Complete Beneficiary Designation form setting out Trustee,
                                                                               (usually age 18)                                                    •   Insurer uncertain who to pay, resulting in payment into court
                                                                                                                                                                                                                              name and date of trust
                                                                           •   If no formal trust agreement exists, the provincial Trustee         •   Delays and additional costs
                                                                                                                                                                                                                              –    trust terms must be contained in the trust agreement
                                                                               Act applies

    “To my Trustee, Ed Jones, of the Paul Doe Trust”                       •   Insurer uncertain who to pay                                        •   Insurer uncertain which party to pay – payment into court          •   Name an alternate or contingent Trustee in policy designation,
                                                                                                                                                       until matter determined by court                                       in Will or in formal trust agreement
    –   Trustee is unable, unwilling or dead                               •   Appointment of new Trustee must be made by court
                                                                                                                                                   •   Delays and additional costs
                                                                           •   Beneficiaries may seek immediate payment


    “To John Doe, Trustee, for the John Smith Family Trust”                •   If family trust agreement is not provided to insurer, insurer has   •   Insurer will request copy of family trust agreement                •   Provide insurer with trust agreement
                                                                               no proof that the trust or a proper Trustee exists
    – the family trust is the owner and the beneficiary under the policy                                                                           •   If insurer is uncertain or does not have the proof to make
                                                                                                                                                       payment to trust at claim time, payment will be made
                                                                                                                                                       into court

                                                                                                                                                   •   Delays and additional costs



    Where the designation is part of a trust for a Retirement              •   If insurer is unaware of Trustee change, payment could be           •   Insurer pays wrong party                                           •   Insurance advisor provides RCA Trust Agreement to insurer
    Compensation Agreement (RCA):                                              delayed or made to wrong party                                                                                                                 to ensure agreement allows for change in Trustee
                                                                                                                                                   •   Insurer delays payment until it receives notice of new Trustee
                                                                                                                                                                                                                          •   Change of beneficiary designation and proof of new Trustee
    “To John Doe, Trustee of the Jones, Inc. RCA Trust”                                                                                                                                                                       appointment filed with insurer

    – the trustee changes




6
    Beneficiary Designation Table


    The designation, including:                                    Issues with the designation & questions                                 What could happen when it’s time                                      Alternative solutions
    ✓ a specific example of a designation or                       to consider                                                             to pay the proceeds

    ✓ a description of a scenario

    “John Doe, Trustee of the Will of John Smith”                  •   Is this the last designation made?                                  •   If insurer is uncertain who to pay – payment into court           •   Identify the Will in the Beneficiary Designation form. Sample
                                                                                                                                                                                                                     wording: “The Trustee of the insurance trust created in the last
    –   beneficiary designation is in the Will                     •   Does insurer have notice of designation?                            •   Insurer may require probated Will or notarial copy
                                                                                                                                                                                                                     Will and Testament dated (insert date, month, day and year) of
                                                                   •   If date of Will is not provided, which Will is the designation                                                                                the life insured”
                                                                       referring to?
                                                                                                                                                                                                                 •   Provide a copy of the Will to insurer
                                                                   •   Is this the last known Will?
                                                                                                                                                                                                                 •   If new Will is made, ensure that new beneficiary designation
                                                                   •   Has a separate insurance trust been created in the Will?                                                                                      and copy of new Will are filed with insurer

    “To the XYZ Corporation”                                       •   Who is payment made to if the corporation is amalgamated,           •   If insurer is not provided notice, will make payment into court   •   Provide notice to insurer when changes are made to the
                                                                       dissolved or bankrupt at claim time?                                                                                                          Corporation
    –   Corporation is owner and beneficiary and is no longer in                                                                           •   Payment to Trustee in Bankruptcy upon proper notice
        existence                                                  •   Are there any tax implications?                                                                                                           •   Provide notice of bankruptcy to insurer and any court orders

                                                                                                                                                                                                                 •   Complete change of beneficiary designation and transfer of
                                                                                                                                                                                                                     ownership form where applicable


    With a split dollar agreement, the designation needs           •   One cheque may be issued unless designation is clear                •   If designation is unclear one cheque is paid out by insurer       •   Insurance application should be clear as to ownership – joint
    to be structured so that two cheques will be issued                                                                                                                                                              tenants
                                                                   •   Insurer will not administer the agreement – designation must        •   Insurer does not administer to split dollar agreement
    - one to each party
                                                                       be clear                                                                                                                                  •   Clearly indicate that two cheques should be issued. Sample
                                                                                                                                                                                                                     wording: “On the death of John Doe, the lesser of the death
                                                                                                                                                                                                                     benefit and $1 million to XYZ Corporation, with the remainder,
                                                                                                                                                                                                                     if any, to Mary Doe”

    Proceeds to be paid to different parties depending on when     •   How is future event defined?                                        •   If uncertain who to pay, insurer may apply to pay into court      •   Define the future event to remove ambiguity. Sample wording:
    a future event occurs                                                                                                                      resulting in extra cost and delay                                     “If the death of the insured occurs on or before (insert date,
                                                                   •   How will insurer know if future event has occurred?
                                                                                                                                                                                                                     month, day and year) payment shall be made to x and y
                                                                                                                                                                                                                     equally. If death of the life insured occurs after (insert date,
                                                                                                                                                                                                                     month, day and year) payment shall be made to x, y and z
                                                                                                                                                                                                                     equally.”



    “To Jack Doe”                                                  •   Is a contingent or secondary beneficiary named?                     •   Proceeds paid to owner or owner’s estate                          •   Contingent or secondary beneficiary should be named in
                                                                                                                                                                                                                     Beneficiary Designation form, Will or trust agreement
    –   Jack Doe dies before life insured                          •   Proceeds will be divided equally among surviving beneficiaries      •   Executor or Trustee of estate seeks order from court as to
                                                                       unless stated otherwise                                                 payment of proceeds to beneficiary or provincial legislation
                                                                                                                                               determines recipients if no legal will exists
                                                                   •   If there’s no surviving beneficiary – payable to owner or owner’s
                                                                       estate                                                              •   Delays and additional costs




7
    References to definitions below are primarily those
    found in Part V, s. 171 of the Ontario Insurance Act.


     Checklist of terms                                                                                                     Checklist of terms


     Beneficiary                 Each provincial Act provides a definition of beneficiary. Generally, it is the same from   Life insured                        The measuring life under the policy.
                                 province to province with the exception of Quebec. The beneficiary is a person,
                                 other than the insured or the insured’s personal representative, to whom or for
                                 whose benefit insurance money is payable in a contract or by declaration.
                                                                                                                            Notice                              You need to refer to your province’s Insurance Act to determine requirements for
                                                                                                                                                                providing notice to an insurer of a designation. In the Ontario Insurance Act,
                                                                                                                                                                reference to documents that affect title can be found at s. 207 (1). “Until an insurer

     Beneficiary - Irrevocable   While the irrevocable beneficiary is living, the policy owner may not alter or revoke                                          receives at its head office in Canada an instrument or an order of a court affecting
                                 the designation without the beneficiary’s consent. The insurance money is not                                                  the right to receive insurance money, or a notarial copy, or a copy verified by
                                 subject to the control of the owner or the owner’s creditors and does not form                                                 statutory declaration, of any such instrument or order, it may make payment of the
                                 part of the owner’s estate.                                                                                                    insurance money and shall be as fully discharged to the extent of the amount paid
                                                                                                                                                                as if there were no such instrument or order.” Unlike a revocable beneficiary
                                                                                                                                                                designation, an irrevocable designation is not effective unless it is filed with the
     Declaration                 Generally defined as an instrument signed by the policy owner setting out his or                                               insurer during the lifetime of the life insured.
                                 her intention to make, alter or revoke a designation under a certain policy.
                                                                                                                            Policy owner                        The individual that owns the life insurance policy and generally pays the premiums.
                                                                                                                                                                The policy owner normally holds all rights under the policy, including the power to
     Designation                 A policy owner can designate a beneficiary in the application for insurance, or by
                                                                                                                                                                name beneficiaries and change beneficiary designations. It should be noted that the
                                 a subsequent declaration.
                                                                                                                                                                policy owner and the life insured are not necessarily the same person.

     Henson Trust                This refers to the 1989 Ontario Court of Appeal decision, Ontario (Ministry of Social
                                 Services) v. Henson (1989), 35 E.T.R. 192 (Ont. C.A.). The Trustee has absolute
                                 discretion as to when and how much money will be received by the beneficiary of            References
                                 the trust. Because the beneficiary has no control over capital or income of the trust,
                                                                                                                            Many of the materials referred
                                 any government funds received by a disabled person will not be interrupted.
                                                                                                                            to in this guide can be found on
                                 Provincial disability legislation in certain provinces, such as Alberta, may not permit
                                                                                                                            the Tax & Estate Planning Group’s
                                 a disabled person who has an interest in a discretionary trust to receive government
                                                                                                                            website at:
                                 disability benefits.
                                                                                                                            www.manulife.com/canada/tep



     Instrument                  Can include a Will or other written document, such as a trust agreement.




     Insured                     Owner of the policy. (This term is not typically used. In most instances, the policy
                                 owner is simply called the policy owner.)




8                                                                                                                                                                                                                                                        9
     This specimen trust document addresses a situation where insurance proceeds are to be used to fund
     support obligations for minor children after the death of the person who is paying support under the
     terms of a separation agreement. It may form part of a separation agreement.



     Life Insurance Declaration
     Manulife Insurance Policy No:__________________________________


     This declaration takes precedence over any existing instructions as to how the proceeds of the Manulife insurance
     policy shown above will be paid.

     I,[Declarant’s name], declare that the proceeds of my Manulife insurance policy shown above shall be paid to [insert
     name of Trustee] in trust, if [insert name of Trustee] survives the death of the life insured under the policy. If [insert
     name of Trustee] predeceases the life insured, then the proceeds shall be paid to the person(s) named as Executor(s)
     and Trustee(s) of my Will dated [insert date of Will]. For the purpose of this declaration, [insert name of Trustee] or
     my Executor(s) and Trustee(s), as the case may be, are referred to as my “Insurance Trustees”].

     When the insurance policy’s proceeds are paid to one of my Insurance Trustees as described above, the proceeds
     shall constitute a separate Insurance Trust Fund [“the Fund”] for my children, [insert name of each child], for the sole
     and express purpose of permitting my Insurance Trustees to carry out any legal obligations I have for my children’s
     support and maintenance under a separation agreement made between me and [insert name of former spouse],
     dated [insert date].

     My Insurance Trustees shall make any payment or payments, at any time and from time to time, out of the capital
     of the Fund and/or out of the annual net income derived from it, to or for any one of my children named above, in
     proportions that conform to the terms of the separation agreement mentioned above, for the children’s maintenance
     and benefit and otherwise as my Insurance Trustees in their absolute discretion may determine appropriate.

     Any part of the annual net income referred to above that is not paid out in a particular year shall accumulate and
     be added to the capital of the Fund at the end of that year. If any portion of the Fund remains after all of my
     obligations under the separation agreement described above have been satisfied, the remaining portion shall [be
     paid to me or fall into and form part of the residue of my estate] or [be payable to].

     No compensation shall be payable to [insert name of Trustee] for carrying out the duties in the administration of
     the Fund, but [insert name of Trustee] shall be entitled to be reimbursed for all reasonable out-of-pocket expenses
     incurred in the course of administering the Fund.

     Subject to the terms of this declaration, my Insurance Trustees shall have the same powers, rights, protections,
     obligations and duties in connection with the administration of the Fund as have my Executors and Trustees under
     my Will, dated [insert date], for the administration of my residuary estate.**



     THIS DECLARATION is a declaration within the meaning of the Insurance Act [insert name of Province].



     DATED at [insert city and province] this day of , [insert year].



     ** This declaration refers to provisions contained within the policy owner’s Will. As drafted above, the powers, rights
     and duties of the Insurance Trustees are contained within the Will. If the policy owner wishes to grant the Insurance
     Trustee powers that differ from those in his or her Will, this document will need to set out those powers specifically
     and the terms must be inserted in the text above.
10                                                                                                                                11
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written permission.
Manulife Financial and the block design are registered service marks and trademarks of
The Manufacturers Life Insurance Company and are used by it and its affiliates including
Manulife Financial Corporation.

(08/2006)

				
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