As stated above, a valid beneficiary designation will allow property to be distributed outside a person’s Will but not necessarily their estate. The significance of this depends in part on the precise rules in each jurisdiction for determining the basis on which estate administration tax is calculated and the provincial legal rules for determining what constitutes a person’s estate for various reasons inlcuding satisfying the claims of creditors. The rules may not be the same.

Another item to consider is the impact of the Supreme Court of Canada’s decision which was discussed above with respect to joint ownership as it may extend to all forms of gratuitous transfers from a parent to an adult child including beneficiary designations. If the case applies so that there is a resulting trust where the designation was only for administrative ease, a beneficiary designation would not be effective to reduce probate. There are other legal arguments indicating that beneficiary designations may not work to avoid probate at least not in all cases. However, insurance may be a special exception due to specific wording in the provincial insurance statutes.
In cases where beneficiary designations are determined to work to avoid the estate administration tax, possibly because it is an irrevocable designation, they are implemented by completing the relevant form as required by the plan or policy provider or otherwise required by law. Some designation changes can be implemented through a Will but this is generally not the best option as poor drafting can subject the proceeds to the terms of the Will applicable to the general estate of the deceased not otherwise distributed which will then attract estate administration tax.

A further cautionary note with respect to beneficiary designations is needed. They can lead to unintended results because they distribute proceeds outside of the testator’s Will. For example, consider the situation where a person designates his/her three adult children as beneficiaries of an RRSP plan or an insurance policy. Each child has 2 children of their own all of whom are < 18. Under the testator’s Will there is an alternate distribution scheme saying that if any child predeceases the testator, that person’s share goes to their children equally with appropriate trust and other provisions in case the grandchildren are minors when the testator dies. With the RRSP or insurance policy, it is not appropriate to have the grandchildren as alternate beneficiaries because they are too young to receive the money directly and it would possibly have to be paid into court to be managed by the government until they reach the age of majority. If the testator does nothing, depending on the reprecise wording of the beneficiary designation, if a child predeceases, the balance of the plan could end up being divided only between the two surviving children with the one group of grandchildren being completely left out. The result clearly conflicts with the overall plan as set out in the Will. This is a similar problem to the one described above with joint ownership of property. More careful planning is needed to ensure the testator’s estate is distributed as intended by him/her whether it is done through the Will or other documents.

It should be noted that RESPs are different from plans such as RRSPs and RRIFs. Designating a beneficiary does not have the same results as the person named is not expected to receive the proceeds when the owner of the plan dies. Therefore, beneficiary designations on RESPs will not work to avoid estate administration tax. There are other planning implications of RESPs that are outside the scope of these materials.