Creditor protection and estate benefits in nominee name contracts
Investment insight
Traditionally, life insurance and insurance investment contracts have been given special protection against the claim of creditors under provincial insurance legislation. This article looks at whether potential creditor protection and estate benefits may be available for non-registered and registered insurance investment contracts held on book or in nominee name.
Non-registered nominee name accounts
For insurance investment contracts held in a non-registered nominee name account, the client is the owner of record and can name a beneficiary. Therefore, a strong argument could be made that all the regular creditor protection rules should apply to the insurance investment contract. Specifically, the client has the potential for creditor protection afforded under the provincial insurance legislation if all the conditions are otherwise satisfied — for example, the beneficiary is of the family class¹ to the annuitant (i.e., the beneficiary is the spouse,² child, parent, or grandchild of the annuitant) or is named irrevocably, and it’s not a fraudulent conveyance transaction.
The fact that a client is the owner, can name the beneficiary, and signs the contract, strongly suggests that the regular creditor protection rules should apply. Therefore, the client should be entitled to the same potential for creditor protection as if the client transacted directly with the insurance company.
Registered nominee name accounts
With registered nominee plans, such as registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs), the law is less clear because a trust is involved. The RRSP/RRIF trust (or trustee) are the beneficiary and owner of record of the insurance investment contract, so creditor protection will be jeopardized unless the argument can be successfully made to look through the RRSP/RRIF trust to the beneficiary of the registered nominee name account (i.e., the RRSP/RRIF). This argument has never been tested in the courts and it’s unclear what the courts would decide. As such, Manulife can make no assurances as to the possible success of such an argument.
Estate benefits
With insurance investment contracts held in non-registered nominee name accounts, the client can name a beneficiary on a Manulife contract so that the death benefit bypasses the estate (and probate fees, if applicable).
With insurance investment contracts held in registered nominee name accounts, the death benefit will generally bypass the estate (and probate fees, if applicable) if the RRSP/RRIF of the financial institution has a beneficiary other than the estate named and that beneficiary is still living. However, this will ultimately depend on the financial institution's procedures. Manulife will pay the death benefit back to the registered nominee name plan (the trust) and then the nominee name plan (the trust) pays it out according to the beneficiary designation and administrative procedures.
Insurance investment contract held in |
Non-registered nominee name account |
Registered nominee name account |
|---|---|---|
Potential creditor protection applies |
Likely |
Uncertain |
Ability to bypass the estate |
Yes |
Uncertain |
In dealing with insurance investment contracts held in nominee name, clients should consult their legal advisor to confirm how the law would apply to their specific situation. Manulife can’t guarantee that all of the regular creditor protection rules will apply in such situations.
1 In Quebec, a family class beneficiary would be any of the following: a married or civil union spouse, or descendants or ascendants of the policyholder. 2 The definition of spouse may include a common-law spouse, depending on provincial legislation.
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