The disappointed beneficiary; Another reason planning is useful
There are a few types of assets you can own, that allow the designation of a beneficiary. An RRSP (or RRIF if you are over age 71), TFSA and Insurance policy allow designation. With these assets, the person or persons designated will receive these assets on the owner’s death. They do not fall into the owner’s Estate. Probate fees are avoided. In addition, the transfer of the assets tends to happen quickly. This is important to know, simply because so many of us own these assets or some of them.
Where it becomes complicated is when something changes in life, which would prompt the owner to want to change the designation but in the turbulent circumstances, it is forgotten or overlooked.
For example, when a marriage ends, each former spouse should make a new Will. They surely will also want to change the designation of their assets. If indeed it does not happen, then when the owner dies, there can be a dispute over who should receive the asset (the designated party, a new spouse, or perhaps a child).
Earlier this month, reasons for judgment were released in a case called Knowles v. LeBlanc. This case is significant because this kind of thing happens more often than we might think and so it is useful to see how the Court handled the case. It’s a great lesson in planning.
The deceased, who died in 2019, owned a life insurance policy. He purchased it in 1987 when he was married to his first wife. He designated his first wife as the beneficiary. Not long after, they separated. They divorced in 1991. The deceased then entered a marriage like (or “common law”) relationship around 1993. He lived with his new spouse and they carried on their lives as a couple until the deceased died, at age 68.
The deceased had made the monthly premium payments under the life insurance policy. Payments came, automatically, from a Bank account the deceased shared with his new spouse. The death benefit under the policy was $100,000.
The deceased did not change the designation under the life insurance policy. His first wife remained the designated beneficiary. The second spouse was surprised the designation had not been changed. She challenged.
Predictably, the positions of the two competing persons were opposite. The divorced spouse relied on the actual designation, which had not been changed. The second spouse (whom the Court referred to, legally speaking, as The Disappointed Beneficiary) argued that the divorced spouse held the funds in Trust for her, and she also relied on the legal principle of Unjust Enrichment. The Court first examined the intention of the deceased. As “intention” has become more prominent in modern law, it was important for the Court to determine that. The Court held that the deceased did intend to benefit his second spouse and not the divorced spouse but he forgot or neglected to change the designation in his insurance policy.
The Court also found that there was a lack of evidence the deceased actually changed or sought to change the designation on the life insurance policy. The Court also held that although the first spouse and the deceased made a Separation Agreement and a Consent Court Order when they divorced, the Order and Agreement did not go far enough in the terms, to change the designation away from the first spouse.
The most important issue the Court examined was the Unjust Enrichment.
For this, the Court considers 3 tests. The first two involve finding an enrichment of one person and a corresponding deprivation of the other. The Court found that these first 2 tests were met. The first spouse was to be enriched and the second spouse, most definitely deprived.
The third test, for the Court to determine whether an unjust enrichment exists, is whether there is an absence of a “juristic reason” for the enrichment. That means that the Court needs to determine whether the enrichment and deprivation happen without a reason in law or justice. An example of a juristic reason for an enrichment is the existence of a contract that allows an enrichment.
In this case, the second spouse’s “deprivation” came from the fact that payments of the policy premiums came from a Bank account she held with the deceased. Was there an absence of a juristic reason for the first spouse’s enrichment?
The Court found there was an absence. There was no reason to deny recovery for the second spouse. The deceased and his first spouse, by their agreement, each retained their own property when they divorced. The first spouse was not involved in the lives of the deceased and his new spouse. Payments of the policy premiums came from the second spouse and deceased. So the second spouse, despite the designation in the life insurance policy, recovered all the life insurance proceeds.
In my opinion, the Court’s judgment was thorough and correct. It would have been unjust for the first spouse to collect the benefit of an asset she never paid for. However, on a practical level, the deceased should have changed the designation in his policy when the parties divorced. Though it is not unusual to overlook these sorts of things in the midst of a divorce, I advise anyone in this type of matrimonial situation to review all their assets and attempt to update their status, especially where a separation agreement is to be made. Making a new Will is important as well. Though the Court was right, here, the cost of getting to Court is high and could have been avoided with reasonable planning.