Discover the difference of segregated funds

Canadians enjoy the freedom to choose from a wide variety of wealth-generating investments that help realize one of the fundamental strategies of investing: building a balanced and diverse portfolio. Of the available options, which one makes the most sense will likely depend on your age, your financial position and how you intend to distribute the value of your estate. The best way for people to ensure the distribution process is careful, organized and efficient, and carried out legally, after they pass away is to have a solid estate plan.

Although an estate plan is essential for anyone with either dependants or assets, many people start to think more about their estate as they age. These sentiments should lead to serious discussions with your advisor, who will analyze the situation and offer insights and advice on what to do next.

Estate planning

Throughout the course of their lives, most people acquire financial assets, possessions and other instruments of wealth, as well as items of sentimental value that together, form their estate. With an estate comes a responsibility to plan for the day when some or all of it will be distributed among those who are near and dear.

The estate-planning process can be complicated. Given the potential tax, legal and other costs associated with the settlement of an estate, it’s best left to the experts. Estate planning can include considering strategies to roll assets to a spouse on a tax-deferred basis, or whether to use trusts, multiple wills or charitable donations to save taxes.

Because the details of an estate plan can be complex, settling an estate can test the patience and resolve of beneficiaries and executors alike. Anticipating this complexity can shed light on some of the advantages of owning segregated fund contracts.

Unique benefits

A segregated fund is both an estate-planning tool and an insurance contract that holds investments, all in one. Among the many unique and attractive benefits of segregated funds is the ability to put money into the hands of beneficiaries faster than if those assets flowed through the estate. In essence, an advisor can deliver a cheque to a segregated fund beneficiary within a reasonable amount of time (often within a few weeks), instead of the money remaining idle in an account while the settlement process wears on, which can take months or years.

Because they remain separate from the estate, segregated funds also empower the contract owner’s assets to bypass their estate and probate (the process that confirms the validity of a will and the authority of the executor, or the estate trustee, to administer the estate) and thus avoid the fees associated with the process. This feature is of crucial interest to beneficiaries, since probate can delay the distribution of funds by several months or years (with larger, more complicated or contentious estates potentially taking even longer).

Some segregated funds may also offer a cost-free annuity settlement option. This option allows the owner to require that the death benefit be used to purchase an annuity that releases regular payments to beneficiaries instead of being paid as a lump sum. The payments can be issued for a specific length of time or over a lifetime. Contract owners may be attracted to the flexibility this brings to distributing funds to beneficiaries, given that some may not be prepared or able to manage a large amount of money.

At a glance

Consider some of the unique benefits of owning segregated fund contracts.

• The death benefit payout of a segregated fund passes quickly and directly to the named beneficiaries.
• The benefit bypasses legal, administration and probate fees associated with the estate, leaving more for beneficiaries.
• The estate is distributed in accordance with the owner’s wishes without establishing a trust.
• Wealth transfers remain private, and the disclosure of information is minimized (not applicable in Saskatchewan).¹
• Segregated funds offer potential protection from creditors while the owner is alive, and from estate creditors upon death.
• Beneficiaries of a segregated fund are easier to change than those within a will.
• The benefit is not subject to any challenges to the will or estate litigation, reducing the potential burden and liability for the estate’s executor.
• A segregated fund contract can be an effective tool for financial gifting or charitable donations.
• Transferring ownership of segregated funds is a relatively simple process.
• Guaranteed Investment Accounts (GIA) and Daily Interest Accounts (DIA) can be held within a segregated fund contract.
• An annuity settlement option, if offered, allows the death benefit to be used to buy an annuity and set up periodic payments to pass to the beneficiary for the remaining years of their life or for a specific period.

Avoid contentious issues

Unlike workplace pensions, investment accounts such as Registered Retirement Savings Plans, Registered Retirement Income Funds and Tax-Free Savings Accounts do not have a default spousal benefit. To ensure that your money finds its way to the individual you intend, it is critical to review and update the beneficiary designations on all registered and non-registered investments, pensions and property. If the intended beneficiary is not named on an account, the money could end up in the hands of someone who was named a beneficiary at an earlier time and who may no longer be an appropriate recipient (e.g., a former spouse or an estranged child), causing contentious legal issues regarding who should receive the funds after the contract owner’s death. Note that in Quebec, there are different rules regarding beneficiary designations in the event of divorce.

When it comes to settling estates and distributing the bequests of a will, everyone should be protected from the problems that can arise if some of the terms of the estate are challenged. Inadequate planning can open family wounds that may never heal if the proceeds of an estate are wrongfully awarded or end up devoured by legal fees. Segregated funds can effectively sidestep many of the disputes that can otherwise tarnish the estate settlement process.

A suitable addition

The appeal of segregated fund contracts relies on some key factors that differentiate them from typical mutual funds or exchange-traded funds. What makes them different could be what makes them the right type of investment for you and the people who mean the most to you.

Part of the value of an advisor is their role in alerting you to products and strategies, such as this one, that can help minimize stress and conflict during the process of achieving your financial goals. Speak with your advisor to see if segregated funds would make a suitable addition to your portfolio.

Get to know who’s who

Contract/policy owner: A person who owns a segregated fund contract. The contract owner is the person who will receive the funds when the segregated fund contract reaches maturity. 

Insurance company: The company that the policy owner enters into a contract with and that backs the guarantees of the provisions in that contract.

Annuitant: The person on whose life the duration of the contract, the maturity guarantee and death benefit guarantee are based (excluding Quebec residents). In Quebec, this person is called the life insured (“insured”).

Payee (“Annuitant” in Quebec): The person who will receive any payments while the annuitant/insured is alive.

Beneficiary: A person or persons named on the segregated fund contract who will receive the death benefit when the last surviving annuitant/insured passes away. A beneficiary can be anyone – a family member, a friend or even a charity.

Advisor: Advisors licensed to sell insurance (including segregated funds) can help you determine the segregated fund contract that’s suitable for your needs. An advisor can also help you decide among the specific funds that are available within the contract.

More information about segregated fund solutions is available here. 

¹In Saskatchewan, jointly held property and insurance policies with a named beneficiary are included on the application for probate but do not flow through the estate and are not subject to probate fees.