Who You Should Never Name as Beneficiary

Beneficiaries: we choose them, we name them, we leave stuff to them.

Designating beneficiaries is an integral part of drafting a Will, purchasing a life insurance policy, or setting up a registered investment account. When we think about heirs in the context of estate planning we’re talking about the people or organizations that stand to inherit something after someone dies.

When making beneficiary designations, people have a lot of choices: you can leave all your assets to one beneficiary, or you can name multiple beneficiaries. You can have one person be the beneficiary of your Will, your life insurance policy, and your registered investment accounts, or you can name different people to be beneficiaries of each.

You can name primary beneficiaries who are first in line to receive assets, and you can assign contingent beneficiaries who only receive assets when primary beneficiaries aren’t alive anymore to receive them.

And while you can legally choose anyone in your life to be a beneficiary … that doesn’t necessarily mean that you should. Keep reading to learn more about the nuances of naming heirs, including what happens when:

  • You’ve chosen beneficiaries who can’t receive assets
  • You forget to update your beneficiaries
  • You’ve named your estate as your beneficiary
  • Your beneficiary designations become complicated

What are the most common types of beneficiary designations?

Before we talk about whom you shouldn’t name as heirs, let’s review the status quo.

When making beneficiary designations as part of your estate planning, life insurance policy, or retirement investments, you’re likely naming your:

  • Spouse
  • Common-law partner
  • Children and/or stepchildren
  • Parents
  • Siblings
  • Other close or distant relatives
  • Friends
  • Charitable organizations

You can also name your “estate” when filling out a beneficiary form for your life insurance policy or retirement plan … but keep reading to understand some important things to consider when you’re making that decision.

When you name heirs in your Will, here’s what they receive and how they receive it:

Life insurance death benefit

A death benefit is paid to beneficiaries after the individual for whom the policy was in place passes away. Death benefits may go to one beneficiary or multiple heirs.

When you get life insurance, you’re asked to fill out a beneficiary form with the life insurance company to indicate who should receive a tax-free, lump-sum payment when you die.

You might have the added flexibility to structure your policy to pay the death benefit to any heirs in several payments over time.

Retirement accounts

When you set up a pension plan with an employer or a Registered Retirement Savings Plan (RRSP) with an investment company, you’ll fill out a beneficiary form to designate a person or an organization to inherit the money in these accounts upon your death.

One of the key advantages of having a registered plan is tax deferral. There are some rules that allow for that tax deferral to continue when your registered plans end up in the hands of certain heirs.

If you name a spouse as your beneficiary (by marriage or common-law), your spouse receives the funds from your account on a tax-deferred basis.

If you’re single or widowed, you can name anyone as a beneficiary––but there are some tax considerations if heirs are not a child or grandchild under 18 or a mentally or physically infirm child or grandchild of any age.

For anyone who is not a spouse or a minor/disabled child or grandchild, funds in your retirement account on the date of your death would be taxed as part of your final tax return, usually filed by your Will’s executor. Any growth of the account after you die would be taxed to the beneficiary.

Estate assets

Most of what you’ll leave behind for your heirs will be part of your estate, as indicated by your last Will and testament.

Assets include cash, real estate, investments, intellectual property, and valuables.

Beneficiary designation is a standard part of creating a Will. When you name beneficiaries, do your best to include their full legal names and state their relationship to you. There may be hundreds (or even thousands) of John Smith’s but only one John Lionel Smith that is your brother.

Part of naming beneficiaries in your Will includes deciding what they should receive from your estate. You could leave specific items (like personal property or cash gifts) or you could leave a portion or percentage of the “residue”, which is all of the value that is left after debts and taxes have been paid and the specific gifts have been made.

Whom should I not name as a beneficiary?

If you wanted to, you could name someone you barely know to be a beneficiary in your Will. (We don’t know why you’d want to, but we’re sure you have your reasons…)

There are some scenarios you should be aware of before you name your beneficiaries. Some could result in unnecessary complications for those you leave behind, in addition to tax implications and a longer probate court process.

Scenario 1: You’ve named a minor as a beneficiary.

Result: There’s nothing wrong with naming a minor as a beneficiary, as long as that money will be held in trust until the minor reaches the age of majority (or a later age that you specify).

Without a trust (and trustee), that money will likely need to be managed by a government body until the child reaches the age of majority and then will be distributed in a lump-sum at that time.

If this is a lot of money, you might want to choose a later age for the distribution to take place while giving your trustee the discretion and ability to make some payments earlier if your child needs money for things like education, healthcare, etc.

Scenario 2: You’ve named a person with a disability as a beneficiary.

Result: Similar to what we mentioned about minors, we’re not suggesting that you shouldn’t name someone with a disability as a beneficiary. We’re saying there is a way to do it properly.

If the person is receiving government benefits (like ODSP in Ontario), receiving part of an inheritance might actually disqualify them from continuing to receive the government benefits. It’s best to speak to a lawyer to determine how to handle this situation.

Scenario 3: You’ve named your estate as the beneficiary of your life insurance death benefit and/or retirement accounts.

Result: This is a tricky one. When you name a person (or multiple people) as beneficiary of your insurance policy, the death benefit does not form part of your estate.

That means you don’t have to pay probate fees on the value of the death benefit.

If the death benefit is $1 million, you’re looking at saving your estate $15,000.

When you name an individual as the beneficiary of an insurance policy, there is some flexibility. They’ll likely receive the full payout as soon as they reach the age of majority.

If you would want to delay that distribution, you might consider naming your estate as the beneficiary of the policy and then using the terms in your Will as a way of guiding how those funds are distributed.

A final note: You can’t name your pet as a beneficiary. Yes, it’s unfortunate … but at least they won’t know the difference. Learn more about pets and your Will here.

Why do I need to name primary and contingent beneficiaries?

So you’ve drafted a Will, taken out life insurance, or set up a retirement plan, and you’ve named your beneficiaries. You’re done, right?

Maybe … if you’re sure all your heirs will outlive you.

A “primary beneficiary” is someone who is first in line to receive your assets.

A “contingent beneficiary” is your back up. A contingent beneficiary only receive assets if your primary beneficiaries are deceased or can’t be located.

In your Will, you can name multiple primary beneficiaries to receive specific gifts or portions of your estate. You can also name multiple contingent beneficiaries just in case any of your primary beneficiaries should predecease you.

For your life insurance death benefit and retirement accounts, however, you’ll likely name fewer primary beneficiaries (in many cases, people name only one). If your primary beneficiary dies before you do and you forget to change the designation, your assets from these accounts will need to flow through your estate and therefore probate court––which means taxes, time, and expenses.

Does naming a beneficiary avoid probate?

When you die, probate will most likely be required for your Will. The probate court approves your assets, validates your Will, and confirms your choice of executor.

You can’t avoid probate by naming a beneficiary in your Will.

That said, you may be able to reduce the probate fees payable if you hold certain assets in a way that they will not form part of your estate. Assets held “jointly” pass automatically to the surviving joint-owner and therefore don’t form part of your estate. They are not included in the probate calculation.

When you name an individual (or individuals) as your beneficiary as part of your life insurance policy with an insurance company or retirement accounts, those assets don’t go to probate because they fall outside of your estate.

This is why it’s important to understand whether you wish to name an individual as your beneficiary or naming your estate. You can make the decisions with your eyes wide open that naming the latter as the beneficiary of certain plans and policies will likely result in probate fees, but it could still be the right decision depending on your circumstances.

What happens if I don’t name a beneficiary?

You’re not legally required to name a beneficiary in your Will, life insurance policy with an insurance company, or retirement accounts––but it would be strange not to.

If you don’t name a beneficiary as part of your life insurance policy, the death benefit will flow through your estate. Your loved ones will receive a smaller lump sum payment, and payment will be delayed as the funds go to probate as part of your estate.

If you haven’t named any beneficiaries in your Will, here’s what would happen with your estate in Ontario:

You have a spouse but no children

Your spouse will inherit 100% of your assets.

You have a spouse and one child

Your spouse will receive the first $200,000 of value of your estate, and the rest will be split equally between your spouse and child.

You have a spouse and more than one child

Your spouse will receive the first $200,000 of value of your estate, then ⅓ of the remainder, and the remaining 2/3 will be split equally between your children.

You don’t have a spouse but you have some children

Your children will receive equal shares of the pie.

You don’t have a spouse nor any children

Your parents will inherit everything.

You don’t have a spouse, children, nor any parents

Your siblings will receive your estate in equal portions. If you have no siblings, your nieces and nephews will divide everything equally.