Does Life Insurance Go Through the Estate in Ontario? Executor Guide

Many families rely on a life insurance payout, and executors are often asked whether it is part of the estate. The short answer is that it depends on how the policy was set up and who is named to receive it.

This article explains the general picture, how it affects debts and tax, and what an Ontario executor should check. The policy documents control the answer, so a lawyer can confirm a particular case.

The key question: who is named?

A life insurance policy usually asks the owner to name someone to receive the proceeds. Whether the money is paid directly to that person or becomes part of the estate depends on how the policy was set up and who is named on it. Check the policy and ask the insurer to confirm in writing. How this applies to your situation is worth confirming with a lawyer.

The same idea appears in other assets. For Estate Administration Tax, Ontario excludes RPPs, RRSPs, RRIFs and TFSAs that have a beneficiary designation, as well as jointly owned assets that automatically pass to the surviving owner. How life insurance is treated for that tax is worth confirming with a lawyer.

If the proceeds fall into the estate

Money that becomes part of the estate is handled by the executor. Under a will, the estate is distributed once the assets have been liquidated and funeral and burial expenses and any debts have been paid. That means estate-held insurance money may be used to meet those costs before beneficiaries receive their shares.

The executor keeps accurate records of the estate's assets and transactions. If a trustee believes an expense is properly incurred in carrying out the trust, they may pay it from the trust property, or pay it personally and recover it.

Tax matters too. Before distributing any property, the legal representative of a deceased taxpayer must obtain a clearance certificate from the Minister, confirming that tax amounts have been paid or that security for them has been accepted. A legal representative who distributes without the certificate is personally liable for the unpaid tax, up to the value of the property distributed. The certificate is requested on Form TX19 after the required returns are filed and assessed and income taxes are paid or secured. An estate with a GST/HST number also needs Form GST352.

Children and beneficiaries who cannot be found

If a child is entitled to $35,000 or more, the money must generally be paid into court. That does not apply if a will or beneficiary designation names a trustee of the child's money, or if a judge has appointed a guardian of property. If the child will receive less than $35,000, it can be paid to the parent the child lives with or the person with lawful custody, who holds it until the child turns 18 or reaches the age stated in the will.

Where a sole trustee, or a majority of trustees, holds money owed to a beneficiary who cannot be found or paid, the Superior Court of Justice may let them pay it into court, to the Accountant of the Superior Court of Justice. Payment is by certified cheque, money order or bank draft payable to that office, or with a Direction to Receive Funds from the court office.

Other payments that arrive after a death

Insurance is not the only money that may be available. The CPP death benefit is a basic $2,500 plus a possible top-up of $2,500, for a maximum of $5,000. The executor named in the will or the administrator appointed by the court applies, and should do so within 60 days of the date of death. If there is no estate or the executor has not applied, it can be claimed by the person or institution that paid the funeral expenses, then the surviving spouse or common-law partner, then the next of kin.

Not everyone qualifies. The deceased must have contributed to the CPP for the required number of years.

What to do next

• Find every life insurance policy, including group coverage through work or a bank.
• Ask each insurer who is named and whether proceeds are payable directly or to the estate.
• Ask each insurer what documents it needs to process a claim, and keep copies of what you send.
• Keep insurance proceeds that belong to the estate separate and record them.
• Check with a lawyer before distributing if the policy or will is unclear.

Frequently asked questions