In the complex world of estate management, one crucial aspect often overlooked is the safe and secure delivery of inheritances to beneficiaries.
While bank drafts and certified cheques have long been the standard method for this purpose, recent developments and inherent risks have prompted a shift in the way estates are handled. A recent story covered by Angelina King and Leah Hendry from the CBC sheds lights on the challenges inheritors face, with a retiree losing $300k after Canada Post lost an inheritance cheque sent by registered mail.
The Inherent Security of Bank Drafts
Beneficiaries have long favored bank drafts for their inheritances due to the perceived safety and the absence of holds on the funds. Bank drafts are essentially as close to cash as you can get within the banking system. Unlike regular cheques, where funds are withdrawn only upon negotiation, a bank draft represents an immediate transfer of money from the account, making it nearly as secure as physical cash for the recipient.
However, there’s a significant catch: banks cannot stop payments on bank drafts. Once a bank draft is issued, the money has already left the account. This means that whoever possesses the bank draft effectively holds the cash equivalent.
The Risk of Identity Theft and Fraud
While bank drafts offer a high level of security, they are not without risk. One of the primary concerns is the potential for fraud through identity theft. Recent cases of title fraud highlight the real dangers posed by identity thieves who might deposit a bank draft obtained through fraudulent means. Once deposited, a bank draft can be withdrawn or transferred immediately, leaving virtually no trail to track the funds.
Another less discussed risk pertains to the intended recipient. Unlike regular cheques, bank drafts have no stale-date, which means that even if Canada Post or another carrier finds a lost draft months or even years later, it can still be deposited. If a replacement draft has been issued to an individual to replace a lost draft, and then the lost draft turns up, it could be deposited and the bank that issued the drafts could face significant financial losses.
The Role of Executors and Indemnification
If a bank draft has gone missing, and the bank is asked to issue a replacement, the bank will almost certainly require an indemnity to protect itself against the risk of both the original and replacements drafts being cashed. In estate matters, banks often require the executor to personally indemnify them against potential losses arising from the issuance of bank drafts. This personal indemnification is crucial because the estate itself, which is distributing its assets, cannot provide the required indemnity, as the estate has nothing left and indemnities are only as good as the indemnifier’s ability to pay. As such, banks require personal indemnities and are well within their rights to demand this security, given the risks involved.
However, it’s important to recognize that banks are taking on a considerable risk even with the indemnity in place. If the indemnifier (the executor) cannot fulfill their obligation, the bank may still incur losses. Therefore, banks are cautious when handling such transactions, and their primary responsibility is to protect the deposits of all their customers. They cannot be expected to bear the risks associated with estate distributions, particularly when substantial sums are involved.
A Shift Towards Secure Alternatives
Due to the evolving risks and complexities involved in using bank drafts and certified cheques, the practices in estate administration are changing. Wire transfers have emerged as a more secure alternative for handling large sums of money. Wire transfers provide a high level of security, reducing the chances of fraud or identity theft significantly. However, beneficiaries often find them more complicated due to their unfamiliarity with the process. This shift in practices places additional responsibility and risk on the shoulders of the executor.
A Cautionary Tale for Executors
The story of delivering inheritances through bank drafts or certified cheques serves as a cautionary tale for executors. Incidents of lost cheques, drafts, and important legal documents have occurred with every major carrier, investigations into such losses are often unhelpful and carriers typically do not accept responsibility for these losses, leaving beneficiaries and executors in a challenging predicament. The burden of ensuring the safe arrival of these critical documents and assets ultimately falls on the sender and the recipient.
Executors must be aware of the evolving landscape and consider the potential risks involved in delivering inheritances through bank drafts or certified cheques.
While beneficiaries may have their preferences, it is essential to prioritize the security of the assets in an estate. Executors should weigh the convenience of beneficiaries against the potential risks to the estate and act accordingly. In a world where financial transactions are becoming increasingly complex, it is more crucial than ever for executors to exercise caution and diligence in their roles.
Luckily, there was a happy ending to the CBC story because Canada Post located the draft. This is an extremely rare outcome.
Craig Ross would like to thank our Student-at-Law, Pulkit Sahi, for his assistance in writing this blog.