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Invesco Tax & Estate team | August 25, 2020

Locked-in plans: Beneficiary entitlements and creditor protection

Our final blog post in this series covers beneficiary entitlements and creditor protection as they relate specifically to locked-in plans.


Beneficiary entitlements

Most post-retirement locked-in plans are unlocked on the death of the original plan holder. This means that the beneficiary may have the option of taking the locked-in proceeds in cash.

By default and in general, the beneficiary of a locked-in plan is the spouse or common-law partner (CLP) of the plan holder. In some legislation, the spouse or CLP can choose to waive that entitlement. If the plan holder does not have a spouse or CLP, or if the spouse or CLP has signed a death benefits waiver, the plan holder can designate another individual as the beneficiary.

As with RRSPs and RRIFs, if the beneficiary is the spouse or CLP of the plan holder, the proceeds can generally transfer to an RRSP or RRIF belonging to that spouse or CLP on a tax-deferred basis, or the spouse or CLP may redeem the proceeds in cash.


Creditor protection

Federal and provincial legislation outlines protections for RRSPs, RRIFs and their locked-in equivalents. The federal Bankruptcy and Insolvency Act (BIA) ensures that, in the event the plan holder declares bankruptcy, assets held within those plans are generally protected from creditors. The BIA provides creditor protection in bankruptcy to locked-in assets regardless of the pension legislation that governs the locked-in plan. Note that the BIA does not protect contributions made to those plans in the 12 months before a declaration of bankruptcy, though this is generally only a consideration for non-locked-in RRSPs and RRIFs, as contributions cannot be made to a locked-in plan. Furthermore, the law does not protect transfers made to an RRSP, RRIF or locked-in plan if the purpose of that transfer was to evade creditors. In such instances, the courts may examine transfers made more than 12 months before bankruptcy in determining what assets may be payable to creditors.

Creditor protection for RRSPs, RRIFs and locked-in plans outside bankruptcy scenarios varies by province. While some provinces have legislation that provides additional protection to those plans, the scope of that protection varies. Other provinces do not have legislation that contemplates creditor protection outside bankruptcy, but protections may still exist under common law as a result of past court rulings. Due to the breadth of this topic, obtain professional legal advice regarding what protections, if any, may exist in a particular circumstance.

Once assets are withdrawn from an RRSP, RRIF or locked-in plan, creditor protection generally ceases. This protection ceases regardless of the type of withdrawal. For instance, minimum payments from a post-retirement plan may be vulnerable to creditor claims, as are amounts unlocked from a locked-in plan through one of the early unlocking options discussed in the previous blog post. That said, if the unlocking option results in a transfer to an RRSP or a RRIF, rather than a cash withdrawal, the transferred funds may remain protected from creditors.

Insurance policies held within RRSPs, RRIFs and locked-in plans have broad protection from creditors under insurance legislation. Insurance policies in those plans are generally protected from creditors during the lifetime of the plan holder and, provided the plan holder names a beneficiary other than the estate, the proceeds remain protected from the plan holder’s creditors after death.

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The information provided is general in nature and may not be relied upon nor considered to be the rendering of tax, legal, accounting or professional advice. Readers should consult with their own accountants, lawyers and/or other professionals for advice on their specific circumstances before taking any action. The information contained herein is from sources believed to be reliable, but accuracy cannot be guaranteed.