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Pay attention to your RRSPs during a marriage breakdown

Not all marriages work out. But I admire those that last for the long haul.

A woman we know has been married for 65 years. She doesn't go out at night with her husband any more.

"The only thing he takes out at night now is his teeth," she always tells me. Still, they wouldn't have life any other way.

But if you're one of the thousands of Canadians who is separated, divorced, or thinking about it, take the opportunity to think about who you've named as beneficiary of your registered retirement savings plan. After all, it's RRSP season and your plan may be top of mind. And be mindful of the Gaudio court decision. Let me explain.

The case

On May 4, 2005, the Ontario Superior Court reached a decision in the case of Gaudio vs. Gaudio.

Francesco Gaudio and Debra Ann Gaudio entered into a separation agreement in October, 2004. In the agreement, Ms. Gaudio released her entitlement to a share of her husband's estate, and the two settled all claims between them.

Then, on Jan. 10, 2005, Mr. Gaudio died. He had no will, had not divorced or remarried, and had no kids. He was survived by his mother and siblings. Prior to his death, Mr. Gaudio had not changed the beneficiary of his RRSPs, or life insurance policy. Ms. Gaudio had been the named beneficiary under her husband's registered plans, and life insurance, while they were married.

Mr. Gaudio's surviving family members argued that the proceeds of the RRSPs and life insurance should form part of his estate, with the result that Ms. Gaudio would not be entitled to any of those assets. They argued that Ms. Gaudio had "bargained away her entitlement to the assets."

Alternatively, they argued, the separation agreement impressed a "constructive trust" upon the proceeds of the RRSPs in favour of Mr. Gaudio's estate. They also argued that the general release clause in the separation agreement ought to be construed as depriving the beneficiary, Ms. Gaudio, of her interest under the insurance policy. The family of Mr. Gaudio felt that Ms. Gaudio would be "unfairly enriched" by receiving the proceeds of the RRSPs and life insurance.

In the end, Justice Clarke held that the terms of the separation agreement did not revoke Ms. Gaudio's right, as the named beneficiary, to the proceeds of both the RRSPs and insurance policy. These proceeds fell outside the estate of Mr. Gaudio under section 53 of the Succession Law Reform Act (Ontario) and section 196 of the Insurance Act (Ontario).

It didn't matter whether the beneficiary designations remained unchanged, because of an error or inadvertence. Justice Clarke stated: "I accept the principle that it is my duty to construe the words actually used by the deceased and not to speculate as to what may have been in his mind."

The advice

Unlike the Gaudio case, there have been other cases in which the rights of a named beneficiary were revoked, but always because the intention of the deceased to revoke these rights was evidenced by one or more factors, such as bitterness in the relationship at the time of entering the separation agreement, remarriage, witnesses who could testify to the intention of the parties, or any indication (usually in an agreement) that the parties had addressed their minds to changing the beneficiary designations.

The moral of the story? Make sure your separation agreement and will are drafted properly to address the issue of designated beneficiaries. And for crying out loud, change your beneficiaries on your registered plans and insurance policies where this is your intention.

Tim Cestnick is a principal with WaterStreet Group Inc. and author of Winning the Tax Game among other titles.

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