Every member of a pension plan expects, upon retirement, to enjoy the benefits that have accrued from a lifetime of contributions to the plan. What happens if an untimely death occurs before the pension is in pay?
Ontario’s Pension Benefits Act1 ensures that the plan offers a benefit — termed a “pre-retirement death benefit” (“PRDB”) — that represents what the member could have
expected to receive as a retiree, had death not intervened. The value of the PRDB will be directly proportional to: (i) the length of time the member belonged to the pension plan; and (ii) the member’s salary during that period.
The form of the benefit depends, at least in part, on whether the member was in a marital relationship at the time of death. In that event, the surviving marital partner — either a legal spouse or a common-law partner — is entitled to that benefit and has three options:
What about the member who was not in a marital relationship at the time of death? In that case, the benefit — a lump sum payment is the only option — will be payable to the pension plan member’s estate, unless it has been directed to be paid elsewhere by means of a validly made beneficiary designation. Beneficiary designations are a popular means of keeping assets out of one’s estate — as a result of which the asset will, generally speaking, not be available to one’s creditors and its value will not be included in the calculation of estate administration tax payable if one’s will has to be probated. They are frequently used to offer such protections for life insurance proceeds and for registered accounts (RRSPs, RRIFs and TFSAs).
Even though the value of a PRDB can in some cases amount to several million dollars, it appears rarely to be top-of mind for a member of a pension plan when going through the estate planning process. Part of the explanation for that view may be the natural inclination of a pension plan member to believe that he or she will live to see the pension in pay. Another part of the explanation may be the “hardwired” statutory entitlement to the PRDB enjoyed by the surviving marital partner. (On this latter point, even if you are a member of a pension plan in a marital relationship you should recognize the possibility that you and your marital partner may be involved in a common accident that neither of you survives. In that case, the PRDB will be “up for grabs”, so to speak.)
The PRDB should be recognized by any member of a pension plan with a philanthropic bent as having the potential to create a significant opportunity to give back to the community, or to increase the amount to be so given back. There is just one income tax caveat in that regard. Despite the ability under provincial law (absent a surviving marital partner) to make a direct designation of all or part of the PRDB in favour of a charity, or more than one charity, you should be cautious before doing so. It is true that you will keep the PRDB out of your estate in that way, however there is currently no donation tax credit available when you make a direct designation of a charity to receive the PRDB. As far as direct charitable beneficiary designations are concerned, the Income Tax Act2 (“ITA”) provides for a donation tax credit only for life insurance proceeds, by virtue of paragraph 118.1(5.2)(a) of the ITA, and for registered accounts, by virtue of paragraph 118.1(5.2)(b) of the ITA. Giving up the attractive benefits of a donation tax credit for a gift deemed to have been made on death may be too high a price to pay for keeping the PRDB out of your estate. To avoid this issue, you should allow the PRDB to pass into your estate and direct all or some part of it to be used to make a charitable bequest through your will.
This article first appeared in the November 2018 issue of Thomson Reuters newsletter, Money & Family Law, November 2018 (Vol. 33, No. 11). It is reprinted with permission.
* Corbin Estates Law.
1 R.S.O. 1990, c. P.8.