Can Creditors Reach Life Insurance, RRSPs and Joint Property in BC?

You may be named on a life insurance policy or an RRSP, or you may have owned a home or bank account jointly with someone who has died. When that person also owed money, it is natural to worry that creditors can come after what you receive.

The answer depends on how each asset was set up. This article explains the rules for registered plan benefits, what is less clear for insurance and joint property, and what an executor should watch for before paying out.

This article covers the law of British Columbia.

What creditors can normally reach

In British Columbia's Wills, Estates and Succession Act (WESA), the estate means the property of the person who died. A personal representative, meaning the executor or administrator, must use their authority to administer and distribute the estate and to account to beneficiaries and creditors.

Federal guidance for legal representatives lists settling unpaid debts, including taxes owed to the CRA, before distributing the remaining assets to the beneficiaries under the will. A personal representative is liable for the deceased's wrongful acts or breaches only to the extent of the assets belonging to the estate, subject to the exceptions in that section.

In plain terms, the estate's assets are the usual source of payment for debts. Assets that never become part of the estate are a different question, which is why the way an asset is held matters so much.

RRSPs and similar plans with a named beneficiary

A benefit payable to a designated beneficiary under a WESA Part 5 benefit plan, such as an RRSP or similar plan, does not form part of the participant's estate and is not subject to the claims of the participant's creditors.

That protection depends on a valid designated beneficiary. If the estate itself is the beneficiary, or no designation takes effect, the benefit is part of the estate and available to creditors. For an irrevocable designation, the benefit is not subject to the control of the participant or the participant's creditors.

Life insurance and joint property

Life insurance and jointly owned property are not covered by the plan rules above, and the outcome turns on the details. For insurance, it matters whether a beneficiary is named or whether the proceeds are payable to the estate. For joint property, it matters how title is held and whether a mortgage or other debt is registered against it.

If a loan is secured on property, the lender generally keeps its security. For a gift of property made in a will, a debt that financed that property generally passes with it, and the beneficiary's interest is primarily liable for the secured debt unless the will shows a contrary intention. A general direction in the will to pay debts does not by itself show that contrary intention.

Debts you signed yourself, such as a co-signed loan or a guarantee, are a separate matter governed by the contract. Loan terms vary by lender, so read your own paperwork and ask a lawyer how it applies.

Risks for the executor

An executor who pays beneficiaries too early can be personally exposed. A legal representative who distributes property without a CRA clearance certificate while tax is owing is personally liable for the unpaid amounts, up to the value of the assets distributed. The certificate request is made on Form TX19. Once a certificate is issued, liability for unpaid tax shifts from the legal representative to the estate, trust, corporation or the people who received the assets.

A personal representative may publish a notice to creditors in the Gazette, and the period for presenting claims must not be less than 30 days from the date of publication. After that period ends, the representative is not liable for claims not presented in time. A creditor's right to recover estate assets from whoever received them is not prejudiced, so a recipient can still be pursued.

A personal representative must also not distribute the estate within 210 days after the grant, except by court order. Earlier distribution is allowed with the consent of all beneficiaries and all persons who may bring a wills variation claim.

What to do next

• Find the plan or policy documents and check who is named as beneficiary and whether the designation is valid.
• Check whether the estate itself is named, since that changes the result.
• List all debts, including any mortgage or loan secured on joint property.
• Do not distribute estate assets until debts and tax are dealt with.
• Ask a lawyer or accountant about any asset whose status is unclear.

Frequently asked questions