Two recent Ontario Court Decisions have Potentially Significant Impact on Beneficiary Designations

We work hard throughout our lives. This hard work may enable us to purchase a home, perhaps enjoy a few vacations, and save excess funds which we hope to transfer to those we love upon our passing. Normally, this wealth transfer upon death can be performed fairly simply with a Will, or via a Beneficiary Designation – in the case of a Registered Plan and/or a Life Insurance policy.

However, designating a beneficiary for a Registered Plan and/or a Life Insurance Policy became more complicated with a 2020 decision of the Ontario Superior Court case, Calmusky v Calmusky.[i]

This article will provide a brief overview of the Calmusky case and outline key implications of the decision. As a brief “spoiler alert”, fortunately for the estate planning community and for Ontarians in general, a separate more recent 2021 decision, also made by the Ontario Superior Court, Mak Estate v Mak[ii], has restored a degree of certainty as to the effectiveness of beneficiary designations.

Overview of the Calmusky Case Facts 

In the Calmusky case, the deceased father, Henry Calmusky, was a widower who died in 2016 leaving two adult sons, Gary and Randy. Included in Henry’s assets at the time of his death was a bank account held jointly with Gary (the “Bank Account”). Gary was also named as the beneficiary of Henry’s Registered Retirement Income Fund (the “RRIF”).

Following Henry’s death, Gary took the position that his late-father had intended for him to have complete ownership of both the Bank Account (by virtue of right of survivorship), and of the RRIF (by virtue of the beneficiary designation). Randy was not overly pleased that these assets went directly to Gary and took the case to court, stating that the Bank account and the RRIF were both held “in trust” for the estate of their father.

The Bank Account 

In the 2007 Pecore v Pecore case[iii], the Supreme Court of Canada ruled that a gratuitous transfer of property from a parent to an adult child was subject to a “Presumption of Resulting Trust”. This presumption would include, for example, funds deposited by a parent into a joint bank account with an adult child.

More specifically, under this resulting trust presumption, upon the death of a parent, that child is presumed to hold the funds “in trust” for the deceased’s estate, unless the child is able to provide evidence that the parent had intended to gift (or advance) the funds to the adult child during the parent’s lifetime.

Accordingly and unsurprisingly, in the Calmusky case, the court applied the principles of Pecore (re the resulting trust principle) and ruled that the joint Bank Account should be held “in trust” for the estate.

So far, so good. Specifically, Gary was found to hold the joint Bank Account “in trust” for the late father’s estate – as there was insufficient evidence to demonstrate that Gary’s father intended to gift his son the Bank Account asset.

The RRIF 

This is where things get problematic. The court in Calmusky then went on to apply this very same resulting trust principle to the RRIF beneficiary designation, regardless of legislation already in place honouring such designations! 

Specifically, although the deceased had signed a beneficiary designation form naming Gary as the direct recipient of the proceeds, the Court found that Gary also held the RRIF asset “in trust” for the estate.

In summary, previously a beneficiary designation for a RRIF would generally have been honoured. However, in the Calmusky case, the funds in the RRIF were deemed to be held “in trust” for the estate.

Implications of the Calmusky Decision

The Calmusky decision was generally surprising and concerning to the estate planning community, as it questioned whether beneficiary designations would be honoured. Moreover, the Succession Law Reform Act (Ontario) (“SLRA”) specifically allows an individual who has a plan, such as a RRIF or an RRSP, to designate a beneficiary. However, the court in Calmusky did not consider the relevant provisions of the SLRA.

As a consequence of the Calmusky decision, the Court created uncertainty as to whether standard beneficiary designations, whether they be for registered plans or life insurance, would now be subject to increased legal scrutiny and potential litigation. Will the principle of resulting trust now apply to insurance policies as well as registered plans and bank accounts? Will an adult beneficiary (other than a spouse) now have to provide additional “proof” (to rebut the presumption of resulting trust)? If the supporting evidence is insufficient, will families be “trapped” in endless litigation?

Mak Estate v. Mak, and Proposed Amendments Submitted by the Ontario Bar Association

In the recent 2021 Mak Estate v Mak Ontario Superior Court decision, the court revisited the issue of whether a presumption of resulting trust should apply in the case of a beneficiary designation to a RRIF.

Fortunately for the estate planning community, the Court confirmed that the sole purpose of a beneficiary designation is to specifically state what is to happen to an asset upon death. The Court stated that “there is good reason to doubt the conclusion that the doctrine of resulting trust applied to a beneficiary designation” and commented how the Calmusky case has received critical comments from the estate and financial planning community.

In the Mak Estate case, the Court found that the plaintiff was unable to establish any intention of the deceased mother that her RRIF was held “in trust” for her estate, and thus the presumption of resulting trust did not apply to her RRIF. In conclusion, the Mak Estate case is a welcomed decision and restores a degree of clarity as to the effectiveness of beneficiary designations in Ontario.

A related update to note is that in light of the Calmusky decision, the Ontario Bar Association delivered a submission to the Attorney General of Ontario to propose amendments to the SLRA and to the Insurance Act (Ontario) to make it clear that the presumption of resulting trust should not apply to beneficiary designations for registered assets or insurance contracts.[iv]

Takeaways 

Based on the conflicting applications of the presumption of resulting trust under the Calmusky and Mak Estate cases, it is prudent to diligently document your estate intentions with your advisor. The stronger the documentation, the less likely it is that a successful legal challenge may result.