Do wills need to be updated? What is the interaction between the beneficiaries of a will and the beneficiaries of a life insurance, RRSP and/or TFSA? The answers to the questions tend to be yes and it is not as simple as you think.
A will is essentially the wishes of the will-maker (known as a testator or a testatrix) and speaks from the date of death. In other words, unless otherwise altered or there are exceptions to this rule (see below for several examples), the wishes contained in the will shall continue to stand (save and except illegality, undue influence, lack of capacity etc.) even if the will-maker passes away decades after the will has been drafted.
Thus, most lawyers will advise that their clients review their will upon some major life-change or the circumstances of their lives are altered significantly. In many jurisdictions, by law, a will is invalidated upon marriage (unless the will specifically states it is being drafted in contemplation of marriage). However, the law is silent in many other cases which may apply to many estates and professional advice should sought.
For example, a spouse or child begins to require some special accommodations after the will is drafted (a physical disability, mental illness etc.). The standard will provision of the residue of the estate (the residue is the portion of the estate left after settling all debts) to spouse and if spouse pre-deceases the will-maker to the children equally may not capture the monetary and non-monetary care a beneficiary may require (readers with disabled children may want to seek professional advice on this matter since there is a complicated interface between disabled beneficiaries and government support payments to the disabled).
A more common issue is if one of the children grows up to be a poor manager of money as an adult. Without setting a trust over the inheritance, the will-maker could simply be throwing their money away. The more immediate issue is if this spendthrift child is costing the will-maker a lot of money in life, which is disproportionate to what the other children are receiving, it may cause family tension which spills over during estate administration (I addressed the issue of the spendthrift child and estate planning previously).
For those who are separated and not divorced, many jurisdictions have passed laws which deem the divorced spouse as having pre-deceased the will-maker (and, thus, not entitled to the estate) BUT this same principle does not apply to separated but not divorced spouses (in Ontario, many couples petition for divorce upon the grounds of living separate and apart for more than 1 year- it is this gap period which becomes a problematic issue).
In other words, the will-maker could inadvertently be including a separated spouse in their inheritance. The standard advice is for a will-maker to amend the will immediately upon separation (please note that separated and divorced spouses can claim support against the estate if, at the time of death, the will-maker was providing support voluntarily or under Court order).
The standard analysis is always the same. If there is a major life event or a material change in your life circumstances or the circumstances of your beneficiaries, it may be time to revisit your will lest there be unintended consequences to the will-makers wishes.
Beneficiary designations in life insurance, registered retirement plans and Tax Free Savings Account (for Canadian readers) may also raise unintended consequences. While a will speaks from the date of death, the exception to the rule is designations in plans proceeds in a will. In this case, the designations in these plans only speak from the date of the will.
In plain English, the will only address the plans in existence on the death of the will and if: (i) new plans are opened subsequent to the will date; or (ii) more importantly, the designated beneficiaries are changed to NOT be consistent with the will after the will is signed, the beneficiary designations in the plans trump the will.
In other words, a will is drafted in 2000 naming the spouse as beneficiary to a life insurance policy and the beneficiary in the life insurance policy is consistent with the will. In 2010, the will-maker changes the beneficiary to the children in the life insurance policy but the will is unchanged. The beneficiaries listed in the life insurance policy will trump the will.
On the flip side of this equation, a policy holder who forgets to change the designated beneficiary in a life insurance plan, retirement plan etc. after a separation or divorce will continue to have the separated and/or ex-spouse named as beneficiary. In some jurisdictions, a divorce will not automatically deem the ex-spouse as having been removed as a designated beneficiary.
For this reason, the typical solution is: (i) keep all beneficiaries consistent; or (ii) change the will if the plans change administrators or the beneficiaries change. Money Smarts has an excellent article on estate planning and the TFSA.
As final food for thought, insurance proceeds payable to a named beneficiary (rather than the estate) passes outside of the estate and is not subject to the claims of the estates creditors (I am assuming the insurance was not bought for the sole purpose of avoiding creditors who are advancing claims). Thus, it is important for individuals who live highly leveraged lives (entrepreneurs, individuals who hold a lot of real estate as investment property, individuals generally with high level of debt) to consider life insurance as a defensive mechanism to protect their loved ones financially after death.
Since the laws governing wills and estate-planning vary from jurisdiction to jurisdiction, the standard disclaimer applies- the following is for information purposes only. Suffice to say, professional advice should always be sought in circumstances where the will-maker or his/her beneficiary have unusual circumstances. Good luck.
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