Today’s article (and questionable grammar) comes from Manulife’s Tax & Estate Planning Group.

The question is: Who do you owe a financial obligation to at death?

The question in the title above is one that all estate planners need to be asking clients. If your client does not plan or think about it, the court may on their behalf. At the end of the day, this may mean that a beneficiary designation will not stand.

The case of Stevens v. Fisher, 2013 ONSC 2282 (CanLII) certainly highlights this point. Camille Stevens lived in a common law relationship for 11 years with Mark Fisher. Mark had various other relationships prior to living with Camille and had children from those unions. One of those previous relationships was with Margaret Eagles. Mark had three separate life insurance policies. The subject of the litigation arose with respect to a Sun Life policy in the amount of $84,000 where Ms. Eagles was named as beneficiary.

Camille Stevens argued that she was a dependant of Mark Fisher at the time of his death in 2010. There were more debts than assets in Mark’s estate. She therefore looked to relief via insurance proceeds. In reviewing the various policies and those in place to meet child support obligations, the court focused on one policy which named Margaret Eagles as beneficiary.

During the 11 years Camille and Mark were together, the court found that it had been a loving and caring relationship. In many instances, Camille placed Mark’s needs above her own and to her detriment financially. She worked for free at an Inn Mark had purchased. When the Inn was sold, she reaped no benefit from the sale. She provided household support and fostered a relationship with Mark’s children to ensure his contact with them. When Mark’s health declined, she cared for him up until his death. She drove him to appointments and made sure he took his medication. Camille provided full emotional and physical support to him.

After Mark’s death, Camille struggled to make ends meet. She could not return to school to upgrade her education because she was working two part-time jobs. She therefore remained in low paying jobs. Her quality of life significantly declined without Mark’s income and subsequent disability payments which contributed to the family unit. When Mark died, he left nothing in his Will for Camille other than a very small RRSP which she paid tax on.

Neither Margaret Eagles nor Camille Stevens knew about the Sun Life policy until Mark’s death. The court indicated that while Mark Fisher left the policy in place since 1995, with Ms. Eagles as beneficiary, he may simply have forgotten to change the beneficiary designation. There was no evidence to support that he had revoked the designation.

While Ms. Eagles had a long relationship with Mr. Fisher going back to childhood, with him coming to live with her family when he was a teen and then living together on and off on three occasions over the years, the court found that the tie between the two had ended in April of 2001 with a final court order . That court order settled their outstanding financial affairs. The court order was silent as to the insurance policy.

In taking all the facts into consideration, the court awarded $75,000 of the insurance proceeds to Camille and paid the remainder to Margaret Eagles. The court reviewed the case law and found that there was, in accordance with the leading cases of Cummings and Tataryn, a moral obligation to provide support and calculated an appropriate amount. The court also reviewed the dependent relief provisions of the Ontario Succession Law Reform Act (SLRA) and found her to be a dependant under the legislation.

While the issue of dependant relief claims is not new, the case certainly reminds estate planners once again that the issue must be addressed or the court will ensure that the obligation is met.

The Tax & Estate Planning Group at Manulife Financial writes various publications on an ongoing basis. This team of accountants, lawyers and insurance professionals provides specialized information about legal issues, accounting and life insurance and their link to complex tax and estate planning solutions.

These publications are distributed on the understanding that Manulife Financial is not engaged in rendering legal, accounting or other professional advice. If legal or other expert assistance is required, the service of a competent professional should be sought.

This year’s federal budget cracks down on a range of strategies and products which use complex structures to minimize taxes. Several popular loopholes will close for sophisticated, high net worth individuals when the government eliminates the tax benefits of leveraged life insurance and annuity arrangements and character conversion strategies. Small business owners will get some breaks, including an increase in the lifetime capital gains exemption for the sale of small business shares. As well, a new tax treatment may be coming for testamentary trusts.

With the March 21 budget, the federal government signaled its intention to eliminate a number of so-called “unintended tax benefits” in efforts to increase revenue and direct investments away from strategies that support investing primarily for the tax benefits involved. A number of these proposals may directly affect policy owners, including changes to the tax treatment of leveraged insured annuities (LIAs), leveraged life insurance arrangements (such as 10/8 arrangements), triple back-to-back annuities, testamentary trusts, and the dividend tax credit.

I will go into further detail with two of these items, LIAs and 10/8s, after the jump.

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I found an excellent article on BloombergBusinessweek that talks about the danger of not having Disability Insurance. Some of the points are specific to U.S. programs, but the general message is the same, and important for anyone who has a family that depends on their income.

Overlooking disability insurance can be costly

by Dave Carpenter on July 25, 2012

Long-term disability insurance is the forgotten insurance.

The importance of auto, health, homeowners and life insurance is well known. But disability coverage, which replaces lost earnings if you can’t work, tends to be ignored — until you need it.

Government studies show that a 20-year-old worker has a 30 percent chance of becoming disabled before reaching full retirement age. Yet only about a third of employees in private industry have long-term disability insurance, according to the Bureau of Labor Statistics.

“It could be argued that the disability of a breadwinner is worse than the death of a breadwinner,” says James Hunt, insurance actuary for the Consumer Federation of America, “because the disabled person is still soaking up money.”

That’s why it makes sense to purchase individual coverage if you’re self-employed — or not covered sufficiently or at all by your employer.

A look at what you need to know about disability insurance:

Q: How does disability insurance work?

A: Disability insurance protects from a loss of income resulting from an inability to work due to an accident or illness. You typically receive disability checks starting three to six months after you become unable to work.

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Q: Do you need to buy coverage if you receive disability insurance through your employer?

A: It depends whether you could get by on the benefit checks. A typical group plan replaces just 40 percent to 60 percent of your salary, up to a maximum $5,000 a month or $60,000 a year. And if the employer pays your premiums, the checks will be taxable.

Benefits can last for either a set number of years or until retirement age. Check your plan’s details closely. Company benefits have been steadily shrinking in recent years. Group policies often limit the duration of benefits to only two years if you can’t perform your job duties.

If your policy looks insufficient, ask your employer whether you can pay for additional coverage. Otherwise, consider getting extra insurance from a private insurer to extend the duration or bring the coverage up to 70 percent or 80 percent of income.

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Q: What should you look for in a policy?

A: If you have a highly specialized job or can simply afford to pay the premiums, it’s worth paying extra to have an “own occupation” policy. This coverage pays benefits if you are unable to perform the major duties of your own occupation. To trim some of the costs, it may be advisable to obtain “own occupation” coverage for one or two years and “any occupation” coverage after that.

The length of benefits is key, and will affect the cost of premiums significantly. Some policies pay benefits until age 65 or until your full retirement age for Social Security benefits, others for two or five years. Seek out a non-cancellable policy.

You probably also want a policy that will pay “residual” benefits, which will compensate for a decline in income if you are able to work at a new job that pays less.

Q: How much does disability insurance cost?

A: Prices vary based on age, gender, occupation, amount of coverage and health status. Check with a broker to get quotes from at least three different insurers.

For someone who does not have coverage at work, a plan with all the extras including inflation protection costs roughly 2 percent to 2.5 percent of annual salary for a man, and 3 percent to 4 percent for a woman. Women pay more because they file claims more frequently and for a longer duration than men.

If someone has coverage at work but wants earnings to boost benefits to 80 percent salary replacement, the annual cost is typically about 1 percent of the worker’s salary.

Photo Credit: In sickness and in health by dominikgolenia on Flickr