A “beneficiary lottery” is what happens when you leave an inheritance to chance

Have you heard the expression “beneficiary lottery”? Probably not, unless you’re in the world of estate planning. No, it doesn’t describe a beneficiary winning a jackpot at a casino or with a lottery ticket. Instead, it’s about beneficiaries having their outcome determined by the order of death. This can happen when partners want whichever of them lives longest to benefit from the deceased’s assets, but have different wishes for what happens after the second death.

For example, take Fred and Ethyl, a couple. Fred has two children from a previous relationship, while Ethyl has none. They go to their legal advisor to have wills prepared. When they meet, Fred tells the legal advisor he wants to leave everything to Ethyl. The legal advisor asks him what is to happen if Ethyl dies before Fred. He responds that he wants to leave everything to his two children. Now it’s Ethyl’s turn to give the legal advisor her instructions. She instructs the legal advisor to set things out in her will to leave everything to Fred, and she confirms she has already designated Fred as the beneficiary of her life insurance in line with her wishes. She advises the legal advisor that if Fred is not alive, her estate is to go to her siblings.

After taking down their instructions, the legal advisor pauses, looks at Fred and Ethyl, and says, “I am not sure if either of you are aware, but the order of your deaths dictates which beneficiaries will inherit your wealth when both of you are gone.”

Fred and Ethyl are confused and ask the legal advisor what he means, since they are both leaving their estates to the beneficiaries they wish to benefit. The legal advisor explains that if Fred dies first, all his assets will go to Ethyl. When Ethyl later dies, everything will be distributed pursuant to Ethyl’s will and her beneficiary designations. This means everything will go to her siblings, and neither of Fred’s children will receive an inheritance. If the order of their deaths is reversed, so Ethyl is the first to die, Fred will receive everything, and on Fred’s death their wealth will be distributed according to his will and beneficiary designations. In this circumstance, Fred’s children will receive everything, and Ethyl’s siblings will lose out.

Fred and Ethyl tell the legal advisor that is not what they intend. Rather, after they’re both gone, they want to leave 50% of any remaining wealth to Fred’s children and 50% to Ethyl’s siblings, regardless of the order of their deaths. To ensure their wishes are realized, their wills and beneficiary designations will need to set out a distribution plan that allows for this to occur. In this case, they instruct their legal advisor to set out that if their spouse has predeceased them, one-half of the estate that remains on their own death is to be divided equally among Fred’s children and the other one-half is to be transferred to Ethyl’s siblings. This will ensure that each group of beneficiaries receives a portion of Fred and Ethyl’s accumulated wealth in accordance with their wishes, provided the surviving spouse does not change their will and beneficiary designations before passing. While Fred and Ethyl have agreed on a 50/50 split, note that the division doesn’t have to be equal between the sets of beneficiaries.

Other mechanisms are available to make sure the ultimate distribution of Fred and Ethyl’s wealth occurs as they both wish. We’ll address this in more detail in a future blog on blended family planning. In this instance, Fred and Ethyl tell their legal advisor they are confident the other will not change their plans after the first partner dies.

If Fred and Ethyl had gone to separate legal advisors and not completed their estate planning together, and if they had not retained a legal advisor experienced in estate planning, then—contrary to their intentions—their estate plan may have left outcomes open to chance, creating a beneficiary lottery in which the order of their deaths will determine which beneficiaries receive a windfall and which will be left out in the cold. Now, both groups will receive their share.

 

I would like to extend a special thank you to my colleague, Magali Dussault-Brodeur, wealth planning consultant at CI Assante Private Client, for her invaluable assistance and unwavering support in preparing each blog.

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About the Author

Valerie Markidis

As a Wealth Planning Consultant with CI Assante Private Client's Wealth Planning Group, Valerie works closely with our team to provide solutions for our clients in the intergenerational transfer of wealth, with a focus on estate planning. Valerie joined CI Assante in 2022, bringing 14 years of experience at two major trust companies, where she held national responsibility for Wills and actively supported advisors across Canada with questions and interpretations related to Wills, Powers of Attorney and Trusts.

Prior to her tenure with the trust companies, Valerie worked in private practice, where wills and estates were some of her key focus areas. She is lawyer with a Bachelor of Law degree from Osgoode Hall Law School and an Honours BA from Queen’s University.