By Kevin Wark
Separation or divorce will be a stressful life event for some of your clients. The parties not only need to cope with interpersonal conflict, but also make difficult decisions associated with the division of family assets, custody rights for minor children, and new living arrangements.
With many critical decisions needing to be resolved within a relatively short timeframe, the implications of separation and divorce for a person’s estate plan can be neglected, sometimes with serious ramifications. Financial advisors can play an important role in their clients’ lives by making sure these planning issues are not “lost in the shuffle.” Some key discussion points that should be raised with separated or divorced clients are outlined in this article.
Most provinces have legislation that will effectively revoke bequests to a divorced spouse, unless there is a contrary intention expressed in the will. It might therefore be assumed that wills don’t require immediate updating where there is a divorce. However, this is not the case. The nature of the person’s financial position and assets may have changed dramatically due to a divorce and could impact gifts under the will. As well, there may be a bequest to the ex-spouse’s family members that should be reconsidered. In addition, in most provinces the appointment of the divorced spouse as executor will be revoked, requiring the appointment of a new executor. These issues all point to the need for a full will review at the earliest possible time.
On the other hand, the separation of a couple does not automatically impact the terms of either partner’s will. This means that a separated partner will continue to be a beneficiary and executor under the other partner’s will. The death of a person before a divorce is finalized could clearly lead to unintended results.
Powers of Attorney
In general, the prior appointment of a spouse as an attorney under a power of attorney for property or personal care is not revoked by the separation or divorce of the parties. Problems can therefore arise if the appointed spouse (now separated or divorced) either refuses to step down as attorney, or resigns without an alternative attorney having been appointed.
Designations under Registered Plans
Beneficiary designations under a registered retirement savings plan (RRSP), registered retirement income fund (RRIF), and tax-free savings account (TFSA) are not automatically revoked due to separation or divorce. Thus, unless a change in beneficiary designation is completed as contemplated under a separation agreement or court order, a former partner will continue to be entitled to the proceeds of any registered plan under which he or she is a named beneficiary. This can be of particular concern for RRSPs and RRIFs where the spouses are divorced. The Income Tax Act requires the proceeds of these plans to be included in the income of the annuitant in the year of death, with related income tax being paid out of the estate. The ex-spouse will therefore receive the gross amount of the RRSP or RRIF on a tax-free basis. In other words, the beneficiaries of the estate will bear the tax cost associated with the deceased’s RRSPs and RRIFs, without benefiting from the proceeds of those plans.
Designations under Insurance Policies
As is the case for registered plans, an insurance designation in favour of a spouse is not revoked upon separation or divorce. Thus, subject to a change in the beneficiary designation as permitted or required under the terms of a separation agreement or court order, the ex-partner will continue to receive the insurance proceeds upon death. Similar considerations apply to designations under group insurance plans.
Interpretive issues may also arise where one spouse is required to purchase or maintain life insurance for the benefit of a separated or ex-spouse, particularly where the policyholder has remarried or entered into a common-law relationship. Recent court decisions have considered whether the current spouse/partner might have a superior claim against the insurance proceeds as a dependant of the deceased, or if the ex-spouse is entitled to all the insurance proceeds or just that portion required to satisfy the claim for support. Insurance advisors can play a key role by ensuring these types of issues are properly addressed and documented.
Wealthier individuals, including owners of private businesses, may establish family trusts for tax, estate, and business succession purposes. One or both parents may be trustees and/or beneficiaries of the trust. Thus, the separation or divorce of the parents (as well as any beneficiary of the trust) should trigger a review of the trust agreement and whether there needs to be change in trustees or trust distributions as contemplated under the trust agreement.
There is a good chance some of your clients will undergo the painful consequences of a marital breakdown. Financial advisors can ensure this life event does not similarly result in painful results for the client’s estate plan and intended beneficiaries.
Kevin Wark, LLB, CLU, TEP, is the author of The Essential Canadian Guide to Estate Planning (2nd Ed.) and The Essential Canadian Guide to Income Splitting.