Estate Planning using Segregated Funds

It has been estimated that close to two trillion in intergenerational wealth transfers will occur in Canada over the next decade as Baby Boomers glide through their “golden years”.  A massive shift of capital will flow through to the “Boomers” and then again to their children or another family member at death.

The key to maximizing any inheritance (either to be received or to be gifted) is to ensure taxes and estate administrative costs are kept to a minimum, specifically by avoiding the process of probate if possible.

What exactly are Probate Fees and what assets are subject to Probate?

Probate is the court-supervised process of authenticating the last Will should one exist. Settling an estate includes liquidating assets, paying final expenses – including income taxes, and distributing the balance of the estate to the rightful beneficiaries.

The process is overseen by a probate court, which has the legal authority to decide whether the Will is valid. For this, they charge a fee referred to as “Probate Fees” and the fee is based both on the size of the estate, and the province the deceased resided.

In B.C no probate fees are charged for estates valued at less than $25,000 but a graduated scale exists for estates larger than this amount. As financial advisors we suggest that our clients use a figure of around 1.5% to estimate the estate’s liability.

Assets that are not jointly owned such as real estate, vehicles, business interests, expensive works of art or antiques plus Non-Registered investments such as Term Deposits, GICs and Mutual Funds would all flow through to the estate and are subject to Probate Fees.

Can Probate fees be avoided if the assets are Jointly Owned?

Yes, but extreme care needs to be used as jointly owned assets now create another layer of complexity for the newly added individual. On a real estate endeavour this may cause the individual to lose their First Time Homeowner’s Exemption, or have the growth be subject to capital gains tax if they already own a home.

Claims by creditors of the newly added joint owner, including a bankruptcy trustee and potential business lawsuits can also make these assets vulnerable, thus proper guidance is needed whenever assets are jointly owned.

Non-Registered investment assets such as Term Deposits, GICs, Mutual Funds, and stock portfolios also must equally share the income tax liability if they are jointly owned, something the second party may not want.

What is important to note is that these same Non-Registered Investments (if owned singularly) must go through the estate at death, if they are held with a bank, credit union, trust company or investment dealer.

Why are Segregated Funds unique?

Segregated funds are like Mutual Funds but are only sold through Canadian life insurance companies. A unique feature is that Seg Funds can have a named beneficiary attached regardless of if it is an RRSP/RRIF, TFSA or held as a Non-Registered investment.

Contracts holding Non-Registered assets (including GICs) inside a Seg Fund can have multiple beneficiaries, which create the following advantages for the family:

  • By not going through the estate, probate fees are avoided
  • Less work and expense for the executor, who may also be charging the estate a fee ranging from 2.5% to 5%
  • Legal fees may also be reduced as less estate administration is involved
  • Potential creditor protection for the individual while alive and for the estate at the time of death, as the amount is paid directly to the named beneficiary
  • Privacy regarding the amount paid to beneficiaries as it is not part of the public domain pertaining to settled estates
  • Excellent way of distributing an inheritance to children in a “blended marriage” where current spouse is to receive the bulk of the estate
  • Can be used as a mechanism to leave a legacy to grandchildren, favourite charity, religious group, or foundation
  • Worried about leaving a large lump sum that could be squandered by a beneficiary with poor money skills? As part of how the proceeds are to be received by the beneficiary, the owner can select the payout is done in the form of an annuity. An annuity provides a stable monthly stream of income that can be designed to last for the beneficiary’s lifetime. This feature is built into a Seg Fund thus avoiding the costly alternative, which would be to put the assets into a Trust.