Assets that Pass Outside Your Will: Understanding the Potential Benefits and Hazards

Many individuals are aware of the importance of creating a will, however, it is important to also understand that not all assets are governed by the terms of your will. Some assets pass directly to beneficiaries outside of your will, and understanding the distinction is essential for effective estate planning.

Certain assets can have designated beneficiaries or joint owners and, as a result, pass directly to these individuals outside of your will. Examples of assets that can pass outside your will include:

• Life insurance policies

• RRSPs/RRIFs

• TFSAs

• Jointly owned property with rights of survivorship.

Assets passing outside of your will bypass the probate process. This can be advantageous because it provides a quicker distribution to beneficiaries and reduced costs associated with probate proceedings. This sometimes tempts people to arrange their affairs to avoid assets passing through their will altogether. However, despite these advantages, there are also several disadvantages and dangers associated with having assets pass outside your will, including:

• Inability to Specify Terms: Without drafting additional testamentary documents such as Life Insurance Declarations, it is typically not possible to establish specific terms or conditions for the distribution of assets that pass outside your will. This lack of specificity can be a significant drawback when dealing with complex family situations, minor beneficiaries, or specific wishes for asset distribution.

• Estate Equalization Issues: Where designated beneficiaries or joint owners differ from those who inherit under your will, there can be challenges in achieving your desired distribution of assets among beneficiaries. It is important to recognize how each person’s share of your estate may be impacted by tax burdens, other estate expenses, or fluctuations in value, which could result in a division of assets that does not reflect your true intentions.

Adding someone as a joint owner with right of survivorship has the following additional disadvantages:

• Loss of Control: When you add someone as a joint owner, they may gain immediate access and control over the asset. This can be risky if the joint owner's interests or financial behaviours are not aligned with your intentions. Once an individual is added as a joint owner, they may have the authority to make decisions about the asset without your input.

• Tax Implications: Joint ownership may have unintended and sometimes immediate tax consequences, which can affect both joint owners.

• Creditor Claims: If a joint owner experiences financial difficulties or is subject to legal action, the jointly-owned asset may be at risk. Creditors could potentially target the shared asset to satisfy debts.

• Family Conflict: Joint ownership arrangements can sometimes lead to family disputes. Siblings or other heirs may disagree about the intentions behind the joint ownership or the distribution of the asset. This can result in legal battles and strained relationships among family members. A frequently-litigated issue in recent years has been whether an individual added someone as a joint owner for convenience (for example, if an adult child is assisting them with their finances), or if they intended to gift the asset to that person.

It is crucial to approach beneficiary designations and joint ownership as estate planning strategies with careful consideration. Seeking advice from legal and financial professionals who specialize in estate planning in Ontario can help ensure that your chosen strategies align with your intentions.

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