Segregated funds: a great
estate planning option

Financial Planning Advisor calls seg funds an estate planning’s “best kept secret.”

Segregated funds (Seg funds) are a lesser-known option for estate planning. Seg funds are versatile instruments for clients with specific concerns like tax and estate planning, explains Glenn Stewardson, CFP®, MFA-P(Philanthropy). As a financial planning advisor specializing in estate planning strategies with Assante Capital Management Ltd. and an Insurance Advisor with Assante Estate and Insurance Services Inc., Stewardson is well-versed in helping clients put plans in place to minimize the tax bill and probate fees left for their family upon their death.

What is a segregated fund?

A segregated fund is an insurance contract issued by a life insurance company. Seg funds have two parts: a pooled investment component (this is similar to a mutual fund) and the insurance policy portion that protects against the loss of the invested capital when a contract matures. By law, a seg fund must guarantee a return of at least 75% of the original capital, and many provide guarantees for 100%. Seg funds are defined as life insurance policies under the Income Tax Act.

The seg funds contract has numerous advantages over other investments in an estate-planning context, particularly when it comes to avoiding probate and protecting privacy.

How can segregated funds help me?

“Seg funds can provide the ability to determine how your beneficiary gets paid,” Stewardson says. “You can bypass the estate and bypass probate. You can take advantage of liquidity and timing of the payment, protect those funds from creditors, and also accomplish your philanthropy goals, all with seg funds.”

When it comes to privacy, clients may not realize that when wills go to probate, they are then considered public documents, and anybody can obtain a copy of the will for a small fee from the probate court. Segregated funds generally do not become public documents. “Your affairs will remain private,” Stewardson says, which allows you to make certain decisions on your estate without listing them in your will for all to see.

Can I name a beneficiary on a segregated fund?

Seg funds are beneficial if you want to reduce the probate fees paid by your estate because they go directly to the named beneficiary. They do not get listed as an asset for probate fee calculations.

Charitable donations can also be easily accommodated and dispersed through seg funds by naming a charity as the policy’s beneficiary.

Stewardson, who called seg funds one of estate planning’s best-kept secrets, adds that seg funds can allow the owner to name multiple beneficiaries or choose to set up multiple contracts with different beneficiaries listed.

One of the benefits of the Registered Retirement Income Fund (RRIF) and the Tax-Free Savings Account (TFSA) is they can have named beneficiaries on those accounts. That means the assets can go directly to the beneficiary without going into the deceased’s estate. They would not be included in the will or the assets for probate fees.

Investments outside the registered accounts cannot include a listed beneficiary. These investments may be called a cash account, open account, margin account, broker account, non-registered account, etc. Because there is no beneficiary, those assets are included and distributed by the will.

“I think of probate planning avoidance as one of those areas where clients willfully look for ways to reduce the fee, but they may create more problems,” Stewardson says. “Many people love the idea of avoiding probate fees. The problem is they lack the strategies or the knowledge to execute.”

He explains that a seg fund can also be structured as an annuity, where the beneficiary receives scheduled payments instead of a lump sum after the insured dies.

Estate planning can be a complicated process. Without a clear plan for avoiding pitfalls, clients usually create more headaches than they solve. So, using seg funds’ beneficiary designations is a powerful tool for tax and estate planning for non-registered funds.