Designated Beneficiaries and Contingent Beneficiaries: What’s the Difference, and Why It Matters

A Designated Beneficiary is the person a testator (someone preparing a will) names to receive an inheritance directly or outside the will, by contract with the financial institution.

A Contingent Beneficiary is the backup: the person who steps in if the designated beneficiary does not survive the testator.

Why It Matters

You never want an intended inheritance to end up in the hands of someone it wasn’t meant for — or, worse, to end up handed to the Government of Ontario in the form of tax that could have been avoided.

Take John. He’s 81, a widower with two children — Bill and Betty, each in their 40s — and each of them has two children of their own. John wants his entire estate split equally between his children, Bill and Betty, and if either has already passed, that share should go to that child’s children.

In this scenario:

• Bill and Betty are John’s Designated Beneficiaries
• Bill and Betty’s respective children are Contingent Beneficiaries — contingent on their parent predeceasing John

Two Kinds of Assets, One Tax Question

John’s estate includes his RRIF (his RRSP converts to a RRIF at his age) and his TFSA—say $1,500,000 and $500,000, respectively— for a combined $2,000,000. It may also include life insurance and pensions, which work similarly.

Here’s how Ontario’s Estate Administration Tax (commonly called “Probate Fees”) applies:

If John names no beneficiary on the RRIF and TFSA, that $2,000,000 becomes part of his estate and is subject to the Estate Administration Tax—currently 1.5% on estate value above $50,000. On a $2,000,000 estate, that’s roughly $29,250, payable to the Ontario Ministry of Finance before the estate can be distributed. (This is before considering any capital gains tax, which is a separate issue.)

If John simply names Bill and Betty as Designated Beneficiaries on the account contracts with his bank, that $2,000,000 passes directly to them, outside the estate — Probate-Fee-free. That’s roughly $29,250 saved.

Now, what if Bill has already died? John’s intention is for Bill’s children to “step into his shoes” and receive Bill’s half tax- and probate-fee-free, as Contingent Beneficiaries.

The Risk: It Depends Which Bank You Use

Here’s the catch. Not every institution will let you name a contingent beneficiary on an RRIF or TFSA. Unlike RBC and BMO (at minimum), TD Direct Investing’s system does not accept contingent beneficiary designations on RRIFs and TFSAs.

When asked why, a TD representative’s answer was simply: “Our system does not allow it.” Asked whether this reflects a written policy — a document, a policy number, a date — the answer was yes! May I receive a copy of that policy: “No”: “it’s ‘internal,’ built into the system, with nothing the client can point to or review in advance. “

What this means for John, directly: if son Bill has already predeceased dad John, and TD won’t honour a contingent designation for Bill’s children, then Bill’s share of the RRIF and TFSA has no living designated beneficiary to receive it. That portion—the roughly $1,000,000 meant for Bill’s branch of the family—falls back into John’s estate by default. At 1.5%, that’s an unnecessary $14,250 or so in probate fees, owed to the government, purely because the bank’s system couldn’t do what John’s will — and his intentions — clearly called for. Father John’s whole objective was to avoid probate fees, but it was frustrated and a loss to John’s hard-earned savings simply because the TD’s “System” doesn’t accommodate “Contingent Beneficiaries”. Come on: Really?

The Takeaway

If your estate plan relies on contingent beneficiary designations to carry out your wishes — and for blended families, families with adult children, or anyone naming grandchildren as a backup (it usually should) — confirm with your specific institution, in writing if possible, that contingent designations are actually supported on the account type you’re using. Draw your own conclusions about where to hold those accounts.

This article is provided for general educational purposes and does not constitute legal, tax, or financial advice. Estate Administration Tax rates and individual institutions’ policies on beneficiary designations can change — confirm current details with your estate lawyer, financial institution, and financial advisor before acting.

Check out our article, “Your Inheritance Might Not Be What You Think”