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 the beneficiary may have the option of taking the locked-in proceeds in cash.

In general, the beneficiary of a locked-in plan is the spouse or common-law partner (CLP) of the plan holder, if they have a spouse or CLP, by default. In some jurisdictions, 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 be transferred to the beneficiary’s RRSP or RRIF on a tax-deferred basis, or the spouse or CLP may redeem the proceeds in cash. Some jurisdictions require the proceeds payable to a spouse or CLP beneficiary to remain locked-in, so instead of transferring the death benefit to an RRSP or RRIF, the funds could be moved to a locked-in equivalent (e.g., a LIRA or LIF). In such situations, the funds can generally still be transferred to the locked-in plan for the spouse or CLP on a tax-deferred basis.

Creditor protection

Federal and provincial legislation outlines protections for RRSPs, RRIFs, and their locked-in equivalents. The federal Bankruptcy and Insolvency Act (the ‘BIA’) can provide locked-in plan property with a measure of protection from creditors in the event the plan holder declares bankruptcy. Creditor protection in bankruptcy under the BIA applies to locked-in assets regardless of the pension legislation that governs the locked-in plan.

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 new 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 is to evade creditors. In such instances, the courts may examine transfers made more than 12 months before bankruptcy in determining what assets may be subject to creditor claims.

Creditor protection for RRSPs, RRIFs, and locked-in plans outside bankruptcy scenarios varies by province. Some provinces have legislation that provides additional protection for those plans, though the scope of that protection varies. Other provinces do not have any legislation to provide creditor protection outside bankruptcy, but protections may still exist under common law based on past court rulings. Due to the breadth of this topic, one should 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. With that said, if the unlocking option results in a transfer to an RRSP or an 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 may remain protected from the plan holder’s creditors after death.