In a hypothetical case study presented during the session, a financial planner did not contact her clients when she learned they were separating because she was uncomfortable. As a result, the couple’s joint plan was not updated and beneficiary designations were not reviewed.
Avoiding such an important conversation “has been a failure to act professionally and has done clients a disservice,” said session moderator Damienne Lebrun-Reid, Executive Director of Standards and Certification and Head of the Board. FP Canada standards.
Except in Quebec, “separation or divorce does not affect designated beneficiary status,” said panelist Kristine Anderson, partner at Bales Beall LLP in Toronto. The designated beneficiary of an asset should be changed if a client no longer wishes their ex-spouse to receive the asset.
In the case study, the planner’s lack of review meant she was unaware of the couple’s separation agreement, which required that the spouse’s beneficiary designation on an insurance policy be maintained as part of a maintenance obligation.
As a result, the planner wrongly helped the policyholder – the husband – to change the beneficiary designation when requested.
Problems can also arise if you do not know your client’s beneficiary designation in a will rather than on a named beneficiary form with a financial institution.
“This is the last designation that will rule,” Anderson said.
However, if an insurer, for example, is not notified of a more recent beneficiary designation in a will, the insurer will pay the policy proceeds to the person named on the institutional beneficiary form.
As such, “the best practices are always for communication,” Anderson said. She suggested that planners specifically ask clients whether named beneficiaries are named both in wills and with institutions.
The difference can be particularly significant when a minor child is the designated beneficiary, she added, as institutional beneficiary forms often lack provisions for establishing a trust for the benefit of the child. As a result, the funds usually go to court and are not readily available to the child.
This headache can be avoided by making the designation in a will as well as provisions relating to the trust, including how the trust funds are to be spent for the benefit of the minor, she said.
Panelist Paul Thorne, director of advanced planning at Sun Life, referred to a BC Supreme Court case regarding the failure to update the designated beneficiary on a life insurance policy at the aftermath of a separation – one that happened decades ago.
The judge noted that the insurer would do well to update its records and remind long-term policyholders of their designated beneficiaries in order to avoid disputes.
The comment “sends a clear message” about the updates that planners should heed, Thorne said.
While planners may want to avoid getting stuck in the middle of legal issues, avoidance only exacerbates client situations. To reduce the risk, “ask deeper questions,” he said, to find the root cause of the problem or the customer’s behavior.
Plus, “It’s a lot easier to spot changes if you’ve already asked questions to establish a client’s pattern of behavior,” he said.
Thorne’s other suggestions included establishing a detailed note-taking process, handling red flags in a timely manner, and leveraging your company’s legal and compliance departments or other business contacts.