Understanding “In-Trust-For” Designations for Assets (RRSPs, TFSAs, Life Insurance)

We sometimes refer to assets like Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs), and life insurance policies as “Beneficiary-Designatable Assets” or “BDAs.” As we have discussed in our “Adult Children and Beneficiary Designations” article, one can generally complete paperwork at the holding institution (e.g. bank, insurance, or pension company) that allows the proceeds of such assets to pass to the named beneficiaries outside of one’s estate passing under one’s will.

As discussed in that article, there can be some significant benefits and potential drawbacks to naming beneficiaries on one’s BDAs. However, sometimes, such assets can be intended for minors or individuals with disabilities. In such circumstances, many financial and insurance advisors and their clients recognize the value of setting up a trust. Unfortunately, insurance and financial advisors will frequently propose doing so by using what appears to be a straightforward designation, such as:

"Give the proceeds of my life insurance policy to my brother, Joe, in trust for my children, Dick and Jane."

While this phrasing may (or may not) be sufficient to establish a basic trust arrangement, where Joe would manage the funds on behalf of the children, it has several significant shortcomings:

• No Contingency for the Trustee: If Joe cannot fulfill his role—due to death, illness, or incapacity—there is no provision for an alternate trustee to step in.
• Unaddressed Changes with Beneficiaries: This simple designation doesn’t account for scenarios where one or more of the children (e.g., Dick or Jane) pass away before the life insured.
• No Clear Instructions for the Trustee: The designation offers no guidance on how Joe should manage or distribute the funds, leaving critical decisions to his discretion without a defined framework.
• No Robust Powers or Protections for the Trustee: The designation leaves Joe with the default powers and protections provided by the common law and Trustee Act. As noted below, these are almost always less than ideal, to put it mildly.
• Premature Access to Funds: Perhaps most concerning, this setup allows Dick and Jane to claim their portions of the funds as soon as they reach the legal age of majority, a scenario many parents might find undesirable. See our “Estate Planning for Minor Children” article for more on this topic.

Given such considerations, it is generally best to establish comprehensive trust provisions to address these issues rather than relying solely on the standard forms provided by the insurance company or other financial institution. These provisions can be integrated into a more detailed beneficiary designation drafted by a lawyer with expertise in creating trusts. Depending on one’s wishes and circumstances, this may be done in a stand-alone document independent of one’s will or as part of one’s will.

As explained in the Continuing Legal Education Society of British Columbia (CLEBC)’s 2022 Edition of British Columbia Estate Planning and Wealth Preservation, “the importance of careful drafting [of a trust] cannot be over-emphasized. … There are three reasons why one must take particular care when drafting a trust deed:

1. Fundamentally, a trust is a conveyance of property. As such, the terms of the conveyance are fixed and unalterable, unless the governing trust deed provides otherwise.
2. The trust relationship is a fiduciary one requiring the trustee to meet the highest standard of conduct imposed at law. Consequently, common-law rules governing trusts tend to be very strict and narrow. Similarly, the existing Trustee Act provides little expansion from this common-law approach. As a result, if it is intended that a trustee be granted more liberal authorities and powers than those permitted under rigid trust law rules, the drafter must have a good understanding of the common law and statutory rules, and the governing trust deed must, from the outset, expressly allow for that kind of flexibility.
3. The mere form of a trust deed can create fundamental and irreversible tax problems under the ITA.

…

A properly drafted trust deed should, within its four corners, address all possible aspects of asset administration and entitlement, whether presently known or entirely contingent and avoid creating fundamental tax problems. It should also contain sufficient flexibility to accommodate future changes in trust or tax law (for example, it may be appropriate to include powers to amend or resettle trust property) [emphasis added].”[3]

Please note that the above concerns about in-trust-for designations echo a related topic discussed in our “In-Trust Accounts” article. That article addresses bank accounts that are ostensibly “held in trust for” a minor child.

In all estate planning, but especially when using trusts, it is critical to obtain the assistance of qualified tax and legal professionals. The landscape of trust law and the taxation of trusts and estates can be murky and dangerous terrain that one should only venture into with the assistance of those with the appropriate expertise.

Working with qualified professionals to proactively attend to the kinds of considerations addressed in this article, individuals can build a robust foundation for a well-executed estate plan that aligns with their overall goals and reduces the risk of leaving an unintentional legacy of expense, conflict, or outright harm. This can be a challenging process. It requires carefully considering the details of one’s assets, wishes, and goals. It also requires keen attention to one’s family structure and dynamics and the relevant legal and tax considerations.

Careful planning like this is always a worthwhile exercise. An ill-conceived estate plan (or, worse, the lack of a plan entirely) can have two primary undesirable outcomes: (1) significant expense, delay, confusion, and prolonged legal conflict for surviving family and beneficiaries, and (2) a few estate litigators get to purchase fancier toys and go on nicer holidays at the expense of your estate and family members.

If you have any questions about in-trust designations, estate planning for minor children, spendthrifts, beneficiaries with disabilities, or any other estate planning or administration matters, we can be reached here.