Estate planning is a multifaceted area that includes taxation, legal considerations, family dynamics, liquidity planning, and more. And with larger amounts of wealth transferring from one generation to the next, we are living in a time where the need for a proper estate plan—much like the complexity of creating one—is greater than ever.
Increasingly, business owners are using life insurance as a strategy when creating an estate’s liquidity plan. Life insurance has proven to be a cost-effective and tax-efficient asset that provides estates with instantaneous liquidity to meet financial obligations while also producing a generous after-tax financial return. As with any professional strategy, however, life insurance does not offer a one-size-fits-all solution. Many factors need to be considered, including how much life insurance is needed, where it should be held, which solution will work best, how much it will cost, and who the beneficiaries will be.
This article focuses on the beneficiaries.
So, who are they?
It’s a simple enough question to answer: A beneficiary is an individual or entity that is entitled to the proceeds of life insurance. What’s not so simple, however, is the process of designating one.
The golden rule is to start by considering the need behind the life insurance. Is it meant to protect family and loved ones? Is it meant to buy out the interests of a business partner? Is it meant to provide an estate with the liquidity it needs to meet its financial obligations?
Let’s look at some of the key factors as they relate to different kinds of beneficiaries.
Minors
A common concern for young families is what will happen if both parents perish in a common disaster or if one parent predeceases the other while the children are still young.
While minors can be named directly as beneficiaries or contingent beneficiaries on an insurance application, this is generally not the most effective way to protect their financial well-being. Although an insurance application allows for the naming of a trustee, it provides only limited set terms for that trustee to follow. Moreover, it provides no instructions on how the insurance proceeds are to be invested, when and how much can be accessed for the maintenance of the children, or when the insurance proceeds will be paid out to the children. Without any such instructions, the insurance proceeds will be paid out when the children reach the age of majority, which is usually not the desired result.
For this reason, it is important to know that in lieu of naming a minor beneficiary directly through an application with an insurance carrier, a legal insurance declaration can be made through a will or another written document. This kind of declaration can direct the proceeds to be settled into children’s trusts, which are otherwise created in a will, and the proceeds will then be bound by the same terms as if they had formed part of the parents’ respective estates—while recognizing that the insurance proceeds do not form a part of these estates.
Probate
Life insurance proceeds can avoid probate where there is a named individual beneficiary, in which case the proceeds will bypass the will and get paid directly to that individual. However, in situations where an estate is listed as the beneficiary, the insurance proceeds will become part of the estate’s assets, subjecting them to the probate process and associated fees.
Creditors
Proceeds from an insurance policy can be placed out of the reach of a policyholder’s creditors when a spouse, child, or grandchild is named as the beneficiary. This is not the case if the proceeds flow through an estate or into a corporation, in which case creditor risk should be considered.
Note, however, that even when proceeds are paid directly to family members, consideration should be given to any of the beneficiary’s potential creditors, as creditor protection does not extend to them.
Resulting trust
From an estate standpoint, the presumption of resulting trust arises when the recipient of property is presumed to be holding the property in trust for estate beneficiaries, rather than receiving it as an outright gift.
Before 2020, it was commonly thought that such presumption would not apply to beneficiary designations. That view changed with the case of Calmusky v Calmusky, in which the court ruled that the presumption of resulting trust applied when an individual received the proceeds of his father’s registered retirement income fund through a beneficiary designation. This decision shifted the onus onto the son to prove that he’d received the funds as a true gift. Ultimately, he couldn’t prove this, so the funds were returned to the father’s estate and distributed in accordance with his will.
Unsurprisingly, this decision sent shockwaves through the estate-planning community. And the drama didn’t end there: The Calmusky decision was subsequently overridden by the ruling in the case of Mak (Estate) v Mak (2021), and then applied again in Simard v Simard Estate (2021), before being overridden once again in Fitzgerald Estate v Fitzgerald (2021).
While the consensus today is that the presumption of resulting trust should not apply to beneficiary designations, these court cases generated lingering uncertainty. As best practice—especially when there is an unequal distribution of proceeds to beneficiaries—professionals should make clear notes regarding the expressed intentions of their clients, and, in some cases, they should recommend that the individual making the beneficiary designation seek independent legal advice and a capacity certificate through a lawyer.
Per stirpes
In the event that a life insurance beneficiary predeceases an insured person, absent any direction, the deceased beneficiary’s share of the life insurance benefit will be split equally among the surviving beneficiaries. Often this does not coincide with the insured person’s desired result, which is for the deceased beneficiary’s share to pass to their own descendants or “per stirpes” (Latin for “by roots”).
It is, therefore, very important that beneficiary designations be properly documented, which in many cases requires drafting a comprehensive written beneficiary designation to be filed with the insurance company.
Shareholder agreements
Often, a corporation’s shareholders’ agreement will require life insurance for key shareholders. This is to provide the company with the liquidity needed to repurchase a departing shareholder’s shares in the event of their death.
Most commonly, the corporation will own the insurance policy and will be the designated beneficiary of the insurance proceeds. Where many shareholders’ agreements fall short is in not addressing what will happen next with the insurance proceeds or how the accompanying addition to the company’s capital dividend account will be allocated.
The agreements that best address life insurance proceeds generally:
a. Give the corporation leeway to use the insurance proceeds in a manner that provides flexibility from a tax perspective (i.e., the proceeds can either be used to redeem the shares of the departing shareholder or be paid out to the remaining shareholders to allow them to purchase the departing shareholder’s shares); and
b. Properly address how the addition to the capital dividend account is to be allocated.
Corporate ownership
Situations may arise in which it is desirable for one company to own an insurance policy while naming a second company as the policy’s beneficiary. However, this is not best practice from a tax standpoint, as was illustrated in the case of Gestion Roy v the King (2022,2024).1
As the Gestion Roy case demonstrates, this type of structuring opens up the possibility of the CRA assessing a taxable benefit under one of many sections of Canada’s Income Tax Act, including sections 15(1), 246(1), 9, and 12(1)(x). To avoid this, it is generally best if the corporation that owns an insurance policy is also the payor of the premiums and the beneficiary of the policy. Similarly, an individual shareholder should not be named as the beneficiary of a corporate-owned life insurance policy.
An important piece of the puzzle
As advisors, CPAs can play a crucial role in helping clients navigate the tax and other intricacies of estate planning, including estate liquidity options and life insurance beneficiary designations, and assist them in working with a trained insurance advisor.
Farzin Remtulla, CPA, CA, is a partner and wealth advisor with ZLC in Vancouver, where he specializes in providing tailored financial strategies to maximize wealth.
This article was originally published in the May/June 2026 issue of CPABC in Focus.
Footnote
1 This case went before the Tax Court of Canada in 2022 and the Federal Court of Appeal (FCA) in 2024. The FCA upheld the Tax Court’s decision.
