How pension rights can limit estate planning

LIRAs and pensions other than the CPP differ from RRSPs and RRIFs in terms of the rights associated with them

How pension rights can limit estate planning

Employment benefits these days tend to not include pensions, but many individuals still have a pension or a locked-in retirement account (LIRA). Many may consider LIRAs and pension funds as similar to RRSPs or RRIFs, but in the estate-planning context, there are important differences to consider.

“In Canada, pensions rights under provincial and territorial jurisdiction are governed by fairly rigid statutory rules,” wrote Susannah B. Roth of O’Sullivan Estate Lawyers LLP in a recent commentary. According to Roth, Ontario pension legislation generally provides surviving spouses the right to receive either a survivor’s pension or a lump sum payable on the death of their spouse.

Those rights held by the surviving spouse take priority over the rights of any other individual who might otherwise have a claim to the pension proceeds, as well as over beneficiaries or interested parties in the pension recipient’s estate. “This ‘super-priority’ applies regardless of the pension recipient's wishes, and despite any beneficiary designation made by the pension recipient,” Roth noted.

LIRAs that are funded by a former pension are subject to the same rules, she added. Similar to pensions, LIRAs are also held to the same “super-priority” rule that favours a surviving spouse over any beneficiary designation. Should the spouses be in a second marriage or a common law relationship, it would not affect the surviving spouse’s right; it could only be revoked if the spouses were living separate and apart at the date of death.

“Because of these legislative restrictions on how a pension or LIRA holder can deal with these funds, the planning options available in respect of pensions and LIRAs are limited,” said Roth. While a spouse may waive their survivor’s right to a LIRA in writing within their lifetime, the waiver can always be revoked. In addition, while a pension or LIRA holder may designate one or more beneficiaries to their pension or LIRA, doing so would not override their surviving spouse’s rights.

The legislative restrictions were put in place to prevent ill-advised or coerced financial decisions by pension holders and their spouses, but their existence means that certain planning options won’t have legal teeth.

For instance, someone in a second marriage may want to leave their pension or LIRA to their children from a previous relationship, but this wish can’t be fulfilled simply through a verbal beneficiary designation or oral agreement between the spouses. Even a binding settlement after the pension holder’s death, or a court order to the contrary obtained with the spouse’s full cooperation and independent legal advice, won’t change the outcome; the institution or pension fund holding the LIRA or pension has its hands legally tied.

Should a pension holder pass away without a surviving spouse or a named beneficiary, many plans would give priority to a minor or dependent adult child over the estate; if an adult child meets the criteria for being a dependent, they would be entitled to receive the pension funds.

“In this way, the rules act as a scheme to protect certain individuals, whether or not they require or even want this protection,” Roth said.


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