You work hard for your money, as the song goes. And you want to take care of your family and know they will be secure financially when you’re no longer with them. That’s the biggest reason why you need a beneficiary. Here are some others:
1. Clarity. Unfortunately, grief often makes some people less clear in their plans. What you want to avoid are family squabbles. Naming beneficiaries make your wishes crystal clear. And in most cases, ironclad legal. It also keeps the peace among family members so that the next reunion won’t end up on YouTube.
2. Speed. When you name beneficiaries on asset investments that permit designations, many of your assets will bypass Probate altogether (Probate is a court application and order that proves a Will is valid). That means your family will have access to the funds they need so they can take care of any emergencies—and they won’t spend a lot of time and money in Probate court.
Some of your assets may still have to go through Probate after your death (like some real estate) but naming a beneficiary beforehand will make that process go so much faster. If you don’t name anyone, the Court has to sort through who has the legal right to claim your assets. If you don’t name a beneficiary for your life insurance policy, the payout from that policy will become part of your estate (which is a fancy word for the money, property, and stuff you leave behind) and it will have to go through Probate. And your family probably can’t touch it while it’s in Probate.
3. Control. When you name beneficiaries in a Will or life insurance policy, or in an investment that permits designations you control where your money goes—and who gets it. If you don’t name someone, the government determines how your assets will be distributed to your heirs. And, get this, depending on the province you live in, that might even include ex-spouses. Yikes!
When You Would Name a Beneficiary
You would name a beneficiary for almost anything dealing with your money. Here are a few examples:
1. Life insurance policy
2. Your last Will and Testament
3. Retirement plans like an RRSP/RRIF and TFSA
4. Savings and checking accounts
Most life insurance companies and investment firms won’t give you the option to put an age requirement for your beneficiaries (such as your kids who are still minors) when you list them. You must put that in your last Will and Testament.
One other important thing to know: If you participate in an employer-sponsored retirement plan such as an RRSP, or a similar account, the law says you have to get written consent from your spouse if you want to name someone other than your spouse as the beneficiary for that account.
Types of Beneficiaries
The primary beneficiary is the person (or people or organizations) you name to receive your stuff when you die. You’ll also need to name a contingent beneficiary (aka a secondary beneficiary) in case the primary beneficiary passes away.
As the name sounds, the primary beneficiary is first in line to receive your assets when you pass away. To make the process as smooth as possible, provide as much specific information about this person (or people or organizations) as you can, including current address and contact information (or similar information for an organization).
Don’t just say, “my spouse gets everything.” That will tie up your assets in Probate for a terrible, horrible, no-good, very long time—especially if you have an ex-spouse.
If you name more than one person, you need to be specific about how the money and other assets should be split up. Use percentages rather than a specific amount with any accounts that could earn interest, because you may have more (or less) money in the accounts when you pass away. And that mistake could land your loved ones an extended holiday at Probate World.
With a contingent beneficiary, this person (or people or organizations) would receive your assets if one or all of your primary beneficiaries can’t be found, or they pass away before you do.
How to Choose Your Beneficiary
When choosing a beneficiary, you need to think about the people who depend on you financially. If you’re married, you’ll likely choose your spouse as the primary beneficiary, and your spouse would choose you. Together, you would name secondary beneficiaries in case something happens to both of you.
Keep in mind, people outside your immediate family may also depend on you. Do you help your parents pay their medical bills? Did you agree to pay for your niece’s education?
Since you can name more than one beneficiary, you can specify what (and how much) each of these people would receive when you die. This way, those who depend on you can still count on your financial support.
Here are some questions to answer as you choose a beneficiary:
1. Who depends on your financial help? Make sure they’re included as a beneficiary.
2. If you have children who are minors, who will be the trustee of their money until they turn 18?
3. Will you set any conditions on when your children can receive your assets? (graduate from college, turn 25, pay off any debt they have, etc.)
4. Do you want any assets to remain in the family? (heirlooms, property, etc.)
5. Do you want to support any churches, charities, or non-profits?
No matter who you choose as beneficiaries, you need to review your documents on a regular basis. Because life happens. A marriage, death, divorce, or broken relationship can mean a change in beneficiaries. Usually, every three to five years in any event.
Read more about Separation, Divorce, and Wills
Want more information?
Are you interested in a consultation with Peter R. Welsh?
Contact me at Peter@SmartWills.ca
By telephone 416-526-3121
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This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.