printable copy: Contingent ownership [PDF 3 pages, 150 kb]
The ability to appoint a contingent owner is unique to life insurance and offers many advantages. While still alive, the contract owner can change the appointment any time and the contingent owner has no rights. When the owner dies, the policy is automatically transferred and bypasses the estate.
Benefits of Appointing Contingent Ownership
Just as a beneficiary designation controls who receives the death benefit, appointing a contingent owner controls who owns a policy, or an interest in it, after the death of the owner.
The Uniform Insurance Act allows a policy with a contingent owner to bypass the estate, which can provide a strong degree of creditor protection.
Joint Tenancy vs. Contingent Ownership
Many clients put ownership of non-insurance assets into ‘joint tenancy with right of survivorship' (JTWROS) in trying to address their need for ownership transfer. There are potential problems with these arrangements that are easily avoided in the case of insurance policies by simply appointing a contingent owner.
Problems with Joint Tenancy
Contingent Ownership Better Solution
When Owner Dies
- In the case of ‘joint tenancy with right of survivorship', when one of the joint tenants dies, the surviving joint tenant(s) now owns the entire property.
- In the case of ‘tenants in common', at the death of the first tenant in common, the deceased's ownership interest forms part of their estate.
- In the case where the policy owner has appointed a contingent owner, the transfer to the contingent owner on death bypasses the owner's estate.
- In all three cases, death is still considered a disposition of the property or policy interest and tax is triggered accordingly, subject to any available rollover.
Avoid Losing Tax Free Rollover
In some cases, the contingent ownership mechanism may be the best or even the only way to effect a taxfree policy rollover.
For example, if a policy owned by a parent is transferred to an insured child or grandchild by the contingent owner mechanism, there is a rollover for tax purposes. However, if the policy is bequeathed in the owner's Will or passes by intestacy, the property becomes part of the owner's estate first, the rollover is lost and a taxable policy disposition is triggered.
Spouses can transfer policies between themselves using either contingent ownership designation, or by Will and still take advantage of a tax rollover. But if the policy is transferred to a spousal trust (or any other trust) a taxable policy disposition is triggered. This is true even if the trustee is appointed a contingent owner. In these situations, policies with low cash values may be a preferred solution to minimize the policy gain.
It's important to note that ‘joint tenancy with right of survivorship' does not exist under the Quebec Civil Code and, while beneficiary designations in Quebec are irrevocable (unless otherwise indicated), contingent owner designations are always revocable.
As well, in the case where the contingent owner is a spouse (married or civil union), the designation continues even when there is a breakdown in the relationship unless the court orders otherwise or the union is dissolved by divorce or annulment.
What Advisors Can Do
- Identify clients who have a joint life last-to-die insurance policy, or joint life annuity.
- Identify any policy where the owner's child or grandchild is the insured and this unique tax and estate planning tool may be useful.
- Discuss the benefits of making sure they have appointed a contingent owner where appropriate Bear in mind that the Income Tax Act contains expanded definitions of ‘spouse' and ‘child'.
The information presented here is for your information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation or other professional advice to advisors or their clients. Before you act on any of this information on behalf of a client, always have your client seek advice from a qualified professional including a thorough examination of your client's specific legal/tax situation.
For Additional Information
For more on ownership issues, see the December 22, 2003, issue of Advisor Notes on Joint Confusion Surrounds Use of Joint Ownership and Co-ownership.