Over many years of work in your profession, you may have accumulated considerable sums in a pension plan offered by your employer. These savings, which represent a lifetime of work, must be taken into account when the time comes to make your estate plan, because federal or provincial laws could have a direct impact on the transmission of these savings to your loved ones and family members following your death.
A detailed assessment of your situation is even more important if your matrimonial status changed during your life as a result of a separation or divorce, followed by a de facto union or a new civil union or marriage. Achieving your estate objectives could be jeopardized. .
To better understand the rules that could apply after your death, Me Nathalie B. Poisson, Practice Leader, Notarial and Estate Law, looks at a few concrete examples.
Priority of payment to the spouse
- Adam has been participating in a pension plan for 25 years.
- Following the death of his wife, he designates his children as beneficiaries of his plan.
- After a little more than two years, he begins a relationship with Megan.
- He dies five years after the start of this union.
Megan, regarded as Adam’s de facto spouse, qualifies for priority of payment to the spouse. She can demand to receive the entire death benefit of this pension plan, regardless of whether it is a provincial pension plan (RREGOP, CARRA, Bombardier, etc.) or a federal pension plan (bank, Bell, RCMP).
It is important to know that priority of payment to the spouse is written in the law and supersedes the designation of the children as beneficiaries provided in the plan. This priority of payment even takes precedence over Adam’s will provisions.
Considering these rules, should Adam have asked Megan to sign a document renouncing her rights in his pension plan at the beginning of their relationship?
- Under the rules governing pension plans under provincial jurisdiction, the participant’s spouse can renounce her rights in the pension plan in advance. However, the spouse can always revoke this renunciation and re-establish the priority that is given to the spouse of the pension plan holder.
- If Adam’s pension was under federal jurisdiction, it would be more difficult for Megan to renounce it in advance because, under the federal rules, renunciation by the spouse can only be done in specific situations and in favour of certain persons only.
When death occurs after retirement
- Peter, age 62, is married to Olivia.
- He retires after 30 years of service with an employer subject to the Supplemental Pension Plans Act (Quebec).
- When he retires, Peter learns that his pension plan gives him two options.
- A pension of $1,000 per month for his entire life, based on the value of his pension fund, whose death benefit provides for the payment of a life annuity to the surviving spouse (minimum of 60% for a plan governed by the Supplemental Pension Plans Act). For the purposes of this example, it is therefore provided that, following Peter’s death, his spouse will receive a monthly annuity of $600 for her entire life.
- Peter’s wife dies.
- Peter begins a new life with Melanie, and, a few years later, he too dies.
Melanie will not be entitled to this annuity of $600 per month for her entire life: only the spouse at the time of the purchase of the annuity (Olivia) is entitled to it.
- Peter could choose to transfer the value of his pension plan to a LIRA because he is under 71 years of age (if he is in the accumulation phase because this is equivalent to a locked-in RRSP) or to a LIF (if he is in the decumulation phase because this is equivalent to a RRIF).
- Let’s assume that Peter chooses to invest this amount in a LIF while he is still married to Olivia.
- They separate, but no judgment is rendered to this effect. This is a de facto separation.
- He begins a new life with Melanie and lives with her for 20 years.
- He dies.
- Peter has a will in which he bequeaths all of his property to Melanie.
To whom will the sums accumulated in Peter’s LIF belong when he dies?
- Considering that the sums accumulated in this LIF initially came from a pension plan governed by the Supplemental Pension Plans Act (Quebec), priority of payment at death is given to Olivia, Peter’s wife, even if Melanie is named universal legatee in Peter’s will.
- If the sums initially deposited into Peter’s LIF came from a pension plan governed by the Pension Benefits Standards Act, 1985 (federal) because Peter was employed by a bank, the answer to this question would be very different: priority of payment at death would then be given to the de facto spouse, pursuant to this Act. In this case, Melanie would be entitled to the sums accumulated in Peter’s LIF.
Federal and provincial nuances
At death, the rules are therefore very different according to whether the pension plan is under provincial or federal jurisdiction. These examples show the importance of identifying the jurisdictions governing a LIF or a LIRA before planning their distribution. Learning about the rules could avoid problems with the execution of your wishes caused by the jurisdiction, which even takes precedence over your will provisions.
Summary of the federal and provincial rules governing pension plans
PRIORITY OF PAYMENT AT DEATH
|LIRA or LIF under provincial jurisdiction||Priority of payment to the spouse||Definition of spouse:
Priority is given to the married spouse.
|Locked-in RRSP or LIF under federal jurisdiction||Priority of payment to the survivor||Definition of survivor:
Priority is given to the de facto spouse.
As you can see, it is important to surround yourself with experienced financial advisors when you prepare your estate plan. The sums accumulated in a pension plan will have significant repercussions on the quality of life of your loved ones when the time comes for their distribution. So make sure to deal with specialists who know the implications of the different laws and who can help you put in place the necessary measures to ensure that your wishes will be carried out.
Professionals’ Financial offers a variety of estate planning services. From liquidator assistance and testamentary trusts to estate tax strategies, we are there to help you and provide you with customized advice for your professional and personal situation. Speak about it with your advisor―he is your direct link to all our expertise.
Nathalie B. Poisson, LL.B., D.D.N.
Practice Leader, Notarial and Estate Law