A recent court decision resolving a dispute over the proceeds of a locked-in retirement account offers a few lessons for advisors. One relates to the obligation of a financial institution to pay out the proceeds of a LIRA to the designated beneficiaries. Also of interest to advisors is the court’s decision about paying out such funds to children who are dependent — even if they aren’t designated beneficiaries.

The dispute in Juffs v. Investors Group Financial Services Inc. arose because the owner of a LIRA failed to make adequate financial provision in her will for her youngest child — effectively disinheriting her only dependent.

The Ontario Superior Court of Justice decision, released in mid-September, shows a claim for dependent support can supercede beneficiary designations in a registered plan. This means clients must make provisions for adequate support in their wills for all of their dependents.

Second, the ruling confirms that financial institutions are permitted by law to distribute the proceeds of a registered plan to the named beneficiaries, unless a court proceeding, such as an order suspending the distribution, is served on them. So if your client suspects that he or she, or his or her child, may not have been named as a beneficiary by a spouse who has just died, the client should be encouraged to hire legal counsel as soon as possible to make sure such an order is served.

TheJuffs case is a sad story, with little positive outcome for anyone, even though the 19-year-old daughter, Chantelle, who originally had been disinherited, won her claim for dependent support.

Her parents, Bonnie and Roy, were separated in 1992 when Chantelle was six years old. They never divorced. Chantelle lived with her father — a low-paid auto-industry factory worker in Oshawa, Ont. — after the separation.

Under a court order, Bonnie agreed to pay monthly child support because she was earning more than her estranged husband. She made some payments, but stopped within a year. The evidence showed that Bonnie had a history of alcoholism and drug abuse. Arranged visits were often terminated because Bonnie would arrive either drunk or stoned. At the time of her death, Bonnie owed $14,885.60 in support payments.

Bonnie died in March 2004. In her will, she bequeathed her entire estate to David and Valerie Soltis, two adult children from a previous marriage.

The only asset of any significance in her estate was her LIRA. Investors Group Financial Services Inc. administered the LIRA, which at the time of Bonnie’s death was worth $32,127.81.

In April, Bonnie’s executor met with Rory Scully, the IG representative who had set up Bonnie’s LIRA. The executor advised him there was a surviving spouse and an 18-year-old daughter. Scully offered his opinion that if Roy were, indeed, a surviving spouse, he would be entitled to the proceeds of the LIRA.

Later that month, Scully met with the executor and Roy, proceeding on the assumption that Roy was a surviving spouse and could be entitled to the LIRA funds. In a fax to an administrative colleague in IG’s London, Ont., office, Scully noted that the IG estates department would want to verify Roy’s marital status.

In early May, IG began the process to distribute the funds from the LIRA to the adult children named in the will. The executor telephoned IG’s call centre in Winnipeg to ask if the company knew that the deceased had a surviving husband and a dependent daughter. The IG call centre receptionist said she would enter this information into the computer file, but IG did not look any further into the issue.

Soon after, IG paid out the proceeds to the designated beneficiaries, David and Valerie. They spent the money within a few months.

Roy, however, did not know the LIRA had been paid out. In mid-May, his lawyer wrote IG asking them not to release any of the LIRA proceeds. The lawyer advised IG, David, Valerie and the executor that Roy would be proceeding with a claim for the six years of child support arrears, and that Chantelle had a dependent’s relief claim under the Ontario Succession Law Reform Act.

The court dismissed Roy’s claim. It deemed him to be “an estate creditor who is trying to access a LIRA that is not part of the estate.” The basis for the court’s thinking was the two-year-old Ontario Appeal Court decision Amherst Crane Rentals v. Perring, which established that the proceeds of a registered plan pass directly into the hands of the named beneficiaries — not to the estate.

@page_break@“Counsel for [Chantelle and Roy] argued that the reasoning in Amherst Crane applies only to [business] creditors, not to child-support creditors,” writes Judge Ed Belobaba in his decision. “I do not read the decision that way. The action by the plaintiff Roy Juffs in his capacity as an arrears creditor claiming against the LIRA proceeds is therefore dismissed.”

“This was a slam dunk [against Roy],” says Barry Corbin, a Toronto-based sole practitioner of trusts and estates law. “He was a creditor trying to collect arrears. Someone forgot to tell him about the Amherst Crane case.”

The court also dismissed Roy’s claim because Chantelle had brought forward “a parallel claim” based on the Ontario SLRA. Corbin notes that Roy’s claim is for Chantelle, who had brought forward a claim herself. Roy was ordered to pay court costs of $16,000 to IG.

Meanwhile, Belobaba clearly supported Chantelle’s claim: “[Bonnie] did not make adequate provision in her will for Chantelle’s support, [giving the] court the power [under the SLRA] to make an order for ‘such provision as it considers adequate’.”

He praised Chantelle’s academic efforts, and her aspirations to become a teacher or journalist.

The court concluded that Bonnie’s contribution to Chantelle’s university education would have been about $15,000, and “on moral grounds” at least half of the outstanding support payments should be paid — for a total of $22,442.80.

This award would have left almost $10,000 in the LIRA for Bonnie’s two adult children. But that didn’t happen.

Instead, notes Heather Evans, partner and lawyer with Deloitte & Touche LLP, this case illustrates the problems with the application of Amherst Crane. The LIRA’s proceeds went directly to the beneficiaries. Chantelle would have been disinherited if her claim was not supported by the SLRA, says Evans. And the court let IG off the hook.

IG was never formally told about any child support arrears or about a possible SLRA claim against the LIRA before it paid out the proceeds, notes Belobaba. The Ontario SLRA allows institutions to pay out plan proceeds to beneficiaries unless the institution is served with an order suspending the distribution.

This case raises the issue of how far financial institutions have to go in terms of due diligence, says Evans: “And the answer is ‘Not very’.”

Corbin suggests a type of form letter could have been written to Chantelle — as a potential claimant — asking that she respond within a certain time limit, such as 30 days. But he wonders whether a financial institution would write such a letter. The institution would be unlikely to do anything that would cause hardship for the beneficiaries.

Judgment in this case was awarded against the two adult children for $22,442.80 plus court costs of $16,000. That’s good for Chantelle, but how long will it take for the half-brother and half-sister to pay her?

The type of letter that Corbin suggests may have averted this litigation altogether, and may have resulted in all of Bonnie’s children getting their just share of the LIRA.

The judge did not set out any guidelines for financial institutions or dependent relief claimants that may find themselves in similar situations in the future.

“It will be interesting to see, as the impact of this decision becomes more widely known, whether there will be a push for legislative change [to the SLRA provisions affecting financial institutions],” says Evans. IE