Beneficiary Designations and Probate: What Skips the Estate in Ontario

Many people hear that naming a beneficiary "avoids probate" and assume the assets are untouchable. The truth is more specific. Some assets do pass outside the estate, but there are exceptions that can surprise families.

This article explains which assets usually skip probate, what that means for Estate Administration Tax and creditors, and where the rules change.

What generally skips probate

For Estate Administration Tax purposes, the estate value excludes assets with a beneficiary designation, jointly owned assets that pass automatically to the other owner, real estate outside Ontario, and registered plans (RPP, RRSP, RRIF, TFSA) with a beneficiary designation.

• Life insurance with a named beneficiary.
• RRSPs, RRIFs, TFSAs and pensions with a designation.
• Jointly owned assets that pass automatically to the surviving owner.
• Real estate located outside Ontario.

Assets that do not fit these categories, such as a house in your sole name or a bank account with no joint owner, generally need an estate trustee. If the deceased owned real property or assets held by a financial institution, the estate normally has to be probated through a Certificate of Appointment of Estate Trustee.

What it means for Estate Administration Tax

Estate Administration Tax is $0 on estates of $50,000 or less. Above that, it is $15 for every $1,000, or part of $1,000, of the estate's value over $50,000, for applications on or after January 1, 2020, and the value is rounded up to the nearest thousand.

Because skipped assets are excluded from the value, a well-designated plan can reduce the amount that is taxed this way. Even so, the Estate Information Return must be filed within 180 calendar days after the estate certificate is issued, even if the estate's value is $0 or the tax is nil.

Creditors and insurance

When a beneficiary is designated, life insurance money does not form part of the insured's estate and is not subject to the claims of the insured's creditors. While the insured is alive, a designation in favour of the insured's spouse, child, grandchild or parent also exempts the insured's rights in the policy from execution or seizure. Spouse includes people who live together in a conjugal relationship outside marriage.

This protection is tied to a real designation. If the designation names the insured's "heirs, next of kin or estate", it is treated as a designation of the personal representative, so the money goes through the estate and does not bypass it.

Unless a designation is irrevocable, the insured may change or revoke it at any time by a declaration. A declaration is an instrument signed by the insured that must be endorsed on the policy and must identify the contract or describe the insurance, and it designates or changes a beneficiary. An insured can name a beneficiary irrevocably in the contract or in a declaration filed with the insurer during the insured's lifetime, and then cannot change it without that beneficiary's consent while the beneficiary is living. An "irrevocable" designation made in a will, or in a declaration that is not filed with the insurer, has the same effect as an ordinary revocable one.

Where the "bypass" stops

• Dependants' support claims: for these claims, life insurance owned by the deceased and amounts payable under a plan designation are deemed part of the net estate, so designated assets can still be reached.
• Time limit: a dependant's support application generally cannot be made more than six months after the grant of letters probate or administration, though the court may allow a later one against any undistributed part of the estate.
• Pensions: in an Ontario-registered pension plan, if the member dies before the pension starts, the spouse is entitled to the pre-retirement death benefit ahead of a designated beneficiary, unless the spouse was living separate and apart from the member on the date of death or has waived the benefit in writing.
• Wills: a life insurance beneficiary can be named in a will, but that designation has no effect against a designation made later than the will.
• Minors: where a child has no guardian of property, money owed to the child may be paid to a parent the child lives with, up to $35,000, and larger sums are normally paid into court through the Accountant of the Superior Court of Justice unless a court-appointed guardian of property receives them.
• Tax: bypassing probate does not mean bypassing tax. An unmatured RRSP is treated as received immediately before death and taxed on the final return, subject to exceptions for qualifying survivors.

Whether a particular asset counts as designated, jointly owned or part of the estate depends on how it is held and on the paperwork. A lawyer can confirm this.

What to do next

• Make a list of each asset and how it is held: sole name, joint, or with a named beneficiary.
• Request copies of current designations from insurers and plan administrators.
• Check whether any designation names the estate, which brings the money back into the estate.
• Do not rely on a designation alone if dependants may have support claims.
• If you are an estate trustee, talk to a lawyer and accountant before distributing, since personal liability can arise if taxes are unpaid.

Frequently asked questions