A new estate planning conversation

Don’t overlook segregated funds’ cost-saving advantages on death

Segregated funds are the often overlooked but hard-working cousins of mutual funds – not quite as familiar to investors, yet with a unique bundle of features that provide protection and potential cost savings. One of their most compelling advantages is the ability to bypass the estate, which means clients’ beneficiaries get their money quickly, privately and without paying estate administration fees. All that, and segregated funds offer exposure to equity and fixed-income markets for a relatively modest additional incremental cost.

Let’s look at two scenarios. First, a client dies with $500,000 in mutual funds in a non-registered account that flows through the estate. After the client’s death, the money is typically either frozen in its current investments or converted to cash. Either result comes with certain risks, and more importantly, the estate beneficiaries don’t have control of the funds to use in the way they think is best. It could be a year or more before the estate is settled, the money is distributed and the beneficiaries have a chance to reinvest it. During that time, the assets are exposed to litigation if the will is challenged and to creditors if the deceased owed money. In addition, there are all the estate administration costs that may be associated with assets that flow through an estate, including legal, executor, accounting and probate fees, where applicable.

Now, let’s see what happens if a client dies with $500,000 in a segregated fund contract in a non-registered account with named beneficiaries. The death benefit does not flow through the client’s estate. If all the paperwork is in order, you get to hand-deliver a cheque from the insurance company to your client’s beneficiaries within two weeks. The assets are generally protected from the client’s creditors and from estate litigation and are not subject to legal, executor, accounting or probate fees. Perhaps most importantly for advisors, you have provided a valuable service to beneficiaries, getting their inheritance to them quickly and without hassle, and can immediately recommend appropriate ways to get that money back into the markets.

Segregated funds offer another important estate-planning advantage in provinces where probate applies, as John Natale, Manulife’s AVP of Tax, Retirement and Planning Services, points out: “When you submit your will for probate, it becomes a matter of public record. Anyone can go down to the courthouse, pay a nominal fee and see a copy of your will. They can see whom you’ve named as executors of your estate. They can see whom you’ve designated or expressed an interest as being the guardians of your children. They can see who the beneficiaries of your estate are. Now, for some people, privacy isn’t a concern – but for others, it’s right there at the top of the list.”

Help clients give more, faster, with an option for control

Because of their estate-planning advantages, segregated funds can be especially attractive to higher net worth clients, who are understandably reluctant to have the value of their estates eroded by fees, as well as appreciating protection from litigation, creditors and prying outsiders’ eyes. With segregated funds, clients can ensure their beneficiaries receive bequests efficiently to cover immediate expenses. They can also exercise a measure of control over the distribution of their assets without the expense and administration required to set up a trust.

The annuity settlement option, available on segregated funds as well as life insurance policies and guaranteed interest contracts (GICs), has no cost. It allows the segregated fund owner to specify that the death benefit be used to purchase an annuity that makes periodic payments to beneficiaries. The annuity can be either a term certain annuity, which makes payments for a specific time period, or a life annuity (with or without a guarantee) that makes payments for a lifetime. Either way, it’s an alternative to gifting a large sum of money all at once, and can be especially valuable in situations where clients have younger beneficiaries, beneficiaries with disabilities or beneficiaries who may not handle a sudden financial windfall responsibly.

“People work hard to save money to provide a nest egg for after they’re gone, and they want to make sure that money is managed responsibly and put to good use,” points out Natale. “The annuity settlement option is very flexible. You can change the beneficiary or remove the beneficiary at any time without any cost, [and] if you want to distinguish between beneficiaries – one beneficiary gets a lump sum and the other one gets an annuity – all these choices are available.”

Make the intergenerational transfer go more smoothly

A death is difficult enough for loved ones to cope with. Segregated funds, with or without the annuity settlement option, can make the transfer of assets fast and easy for clients and their beneficiaries. For advisors, segregated funds keep you in the picture, with a cheque in hand and a valuable in-person opportunity to offer continued asset management services focused on the beneficiaries’ situation and needs. That’s much more rewarding than watching assets languish while an estate settles, and potentially transfer to another advisor after distribution.

To help you explain the rewards of segregated funds to your clients, Manulife developed the Estate Cost Comparison calculator, available on manulifeinvestmentmgmt.ca. The tool clearly demonstrates that even though they cost a little more, segregated funds can often save money on death (see the sidebar). Once you’ve run the numbers, you can generate a report and let your client choose the approach that best suits them.

For more information about segregated funds and their estate-planning advantages, visit manulifeinvestmentmgmt.ca