Beneficiary and estate considerations
Beneficiaries, probate and what passes outside the estate
A beneficiary designation is a small piece of paperwork that decides where a large amount of money goes, and for that asset it overrides what a will says. It is also the thing most often left exactly as it was when the policy was set up.
Worth knowing: A named beneficiary generally means the money passes directly rather than through the estate.
What passing outside the estate means
Where a person is named as beneficiary on a life insurance policy or a segregated fund contract, the money is generally paid to them directly. It does not form part of the estate, so it is not distributed under the will and is not delayed while the estate is administered.
In Ontario, estates valued over $50,000 pay Estate Administration Tax of $15 for every $1,000 above that threshold. Assets passing directly to a named beneficiary are generally outside that calculation, which is one reason the designation matters beyond convenience.
Naming the estate instead
Naming the estate as beneficiary is sometimes deliberate: it lets the will control the distribution, which can be the point where minors, blended families or specific instructions are involved.
The trade is that the money then forms part of the estate, with the delay, the visibility and the administration tax that come with it.
The designations people forget
A designation made years ago survives divorce, remarriage, estrangement and the birth of children unless it is changed. Insurers pay the person named on the contract, not the person who was intended.
Reviewing designations after a significant change in family circumstances is simple, free, and the single most common gap found in an otherwise tidy plan.
Minors and irrevocable designations
Money payable to a minor is not simply handed over; how it is held depends on the province and on what the designation says, which is why trustee provisions exist.
An irrevocable designation cannot be changed without that beneficiary's consent. It is what enables certain creditor protection, and it is also a commitment that is hard to undo. Quebec has its own rules throughout.
Questions people ask
Does my will override the beneficiary on my policy?
Generally not. For an asset with a valid designation, the designation governs, which is why the two are reviewed together rather than separately.
Is a life insurance payout taxable to my beneficiary?
The death benefit from a personally owned policy is generally received tax-free by the named beneficiary. Tax on the estate itself is a separate question.
How often should designations be reviewed?
There is no rule. In practice people review them when something changes: marriage, separation, a child, a death, or a new policy.