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The Sanctity of Insurance Designations

(From the October 2020 Edition of eFORUM)

By Kevin Wark

Insurance advisors will be very familiar with the benefits of designating a beneficiary under a life insurance policy. The proceeds of the policy flow outside of the estate, and are paid directly to the named beneficiary upon submitting proof of the insured’s death. Also, where the insurance is payable to the spouse or children of the life insured (or in Quebec, to family members of the policyholder), the proceeds are generally not subject to claims of the deceased’s creditors. Similar creditor protection also extends to insurance proceeds payable to an irrevocable beneficiary. And in those provinces with high probate fees (for example, B.C. and Ontario), the fact that the insurance proceeds flow outside the estate means the funds are not subject to probate fees and taxes.   

However, advisors and clients need to understand that an insurance designation is not “sacrosanct.” Depending on the relevant circumstances and applicable provincial law, it is possible for a beneficiary designation to be challenged by third parties. The potential for a beneficiary designation in favour of an adult beneficiary to be overturned through legal challenge has now been significantly increased by the recent Ontario court decision in Calmusky v. Calmusky.

Let’s consider the circumstances where a beneficiary designation can be challenged and then focus on the Calmusky decision. 


Existing Situations Where a Beneficiary Designation May Be Challenged

Fraudulent Conveyances — Most provinces have enacted legislation to protect creditors from actions taken by a borrower to make themselves “judgment proof.” Thus, if a person in financial difficulty makes a large deposit to an insurance policy and designates a protected family beneficiary with the intent of defrauding creditors, it is open to the courts to ignore the beneficiary designation and make the insurance funds available to creditors.

Family Law Legislation/Separation Agreements — Provincial legislation governing the division of family assets, as well as matrimonial agreements, may provide a surviving spouse with the ability to challenge a beneficiary designation and have the insurance proceeds made available to satisfy a family law claim.

Dependants Relief Legislation — Similar to family law legislation, a dependant of the policyholder/life insured may be able to make a claim against insurance proceeds payable to a named beneficiary where adequate provision has not otherwise been made for the dependant’s support. 

Constructive Trust/Unjust Enrichment — If a person has made contributions toward the cost of the insurance policy, or given up other rights or entitlements in expectation of being the owner/beneficiary of a life insurance policy, a court may step in to ensure that person receives part or all of the insurance proceeds.

Canada Revenue Agency Claims — The Income Tax Act provides the Canada Revenue Agency (CRA) with powers to “follow the money” in situations where a taxpayer has outstanding taxes and subsequently transfers property to a non-arm’s length person without consideration. These powers have recently been used to hold the beneficiary of a registered retirement income fund (RRIF) responsible for the deceased’s taxes arising from the deemed disposition of the RRIF on the plan-holder’s death.    


Calmusky v. Calmusky — The Presumption of Resulting Trust

In the Ontario case of Calmusky v. Calmusky, Randy Calmusky brought an action against his brother, Gary Calmusky, disputing Gary’s entitlement to the proceeds of the deceased father’s RRIF under which Gary was designated as beneficiary. Randy’s position was that the presumption of resulting trust applied to those funds, and therefore, Gary held them in trust for the beneficiaries of their father’s estate. This presumption applies where a gift is made to an adult person and places the onus on that person to prove a gift was intended on the “balance of probabilities.”

The court first addressed the question of whether the presumption of resulting trust applies to property transfers to adults via a beneficiary designation. An earlier Ontario court decision, as well as a Manitoba court decision, was cited to hold that the presumption did apply to adult beneficiaries. The court then concluded that Gary did not satisfy the onus of establishing his father intended him to have beneficial ownership of the RRIF proceeds upon his death. As a result, the RRIF proceeds fell back into the father’s estate to be distributed in accordance with his will.    

Court decisions in British Columbia, Alberta, and Manitoba also appear to support the view that the presumption of resulting trust applies to beneficiary designations for registered plans as well as insurance policies.   

Advocis and CALU strongly believe that the act of designating a beneficiary pursuant to provincial legislation should not be subject to this presumption, and a submission has now been made to the Ontario government to enact legislation that would effectively reverse the results in Calmusky. Stay tuned for more information as discussions proceed with the Ontario government. 


Protecting Insurance Designations

In the meantime, professional advisors can play an important role by documenting their clients’ intentions to make a gift when designating a beneficiary. This will provide the designated beneficiary with the required “evidence” to meet the evidentiary burden of proof that a gift was intended. 

Inquiries should also be made to determine if other family members or creditors might be tempted to challenge an insurance beneficiary designation. If there appears to be the potential for litigation on the death of the policyholder, legal advice should be obtained.  

Clients should also be encouraged to share their estate plans with family members so everyone is aware of their intentions regarding the distribution of assets, registered funds, and insurance proceeds and hopefully preclude disputes on death. 


Kevin Wark is managing partner at Integrated Estate Solutions and a CALU tax advisor. He is the author of the popular consumer book The Essential Canadian Guide to Estate Planning (2nd Edition).

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