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Segregated Fund Policies and Estate Bypass

Privacy and protection with a segregated fund policy

To help ensure assets pass quickly and discreetly to named beneficiaries, consider segregated fund policies. Leaving an inheritance to someone special is important to many people in order to make sure this legacy passes on quickly, privately and without hassle.

 

The concept

Unlike many investment options, segregated fund policies can generally bypass the estate and associated administration taxes. That’s because these policies can have a named beneficiary other than the estate so assets go directly to the people named as beneficiaries. This means assets bypass the potential delays and costs of estate administration (often referred to as probate). Investments outside of a segregated fund policy could be delayed by this process for weeks, months, or even years.

A will is a public document once it’s entered into court − except in Quebec, if the will is notarized. The personal and financial information it contains can be exposed to public scrutiny. Details of a segregated fund policy are not public (except during Saskatchewan’s estate administration process), ensuring privacy for you and your beneficiary.

 

The details

This legal process takes place when an individual dies. It provides legal proof the will has been certified by the court, and the executor is authorized to represent the estate of the deceased.

Assets that enter probate can be:

  • Delayed – Before assets can pass to the beneficiary, many financial institutions, land registry offices and other third parties may require the executor to go through the estate administration process. This generally involves identifying, inventorying and possibly appraising the assets of the deceased.
  • Costly – Costs can include estate taxes, estate fees and executor fees, which are all typically associated with probate. The amount charged differs by jurisdiction. For example, as of Jan. 1, 2013 in Ontario, new provisions around the way estate administration fees are collected were implemented. The change requires estate representatives – executors and trustees – to provide more information about the deceased to the Minister of Revenue (MNR) than what was previously required. The MNR assesses the estate taxes based on this information. It’s expected these changes will make it more costly and time consuming to administer estates.
  • Affected by unpredictable market changes – Volatile markets could significantly impact the value of your assets – either up or down – as they wait to be paid to the rightful heir.
  • Public – Documents provided usually become public records, which can be accessed by anyone.

 

Privacy and immediacy

Immediacy: An example

Someone dies with $1 million of assets invested outside a trust or segregated fund policy and that person’s estate becomes subject to probate. The person’s estate is complex and takes one year to settle. While the estate was pending, the investments remained exposed to the ups and downs of the market, which in this case caused the value to drop 15 per cent.

When probate finally settled, additional fees further reduced the value. (See table below.)

 

Costs* Potential rate Potential exposure on $1 million
Probate fee (estate tax) 1.45% $14,500
Estate fees (e.g. lawyer) 1% $10,000
Executor fees 5% $50,000
Market risk 15% $150,000
Total $224,500

*Ontario example

The result is a loss of approximately $194,500. With a segregated fund policy, the beneficiary would have immediately received the $1 million invested. (Because many of the costs in this example were estimates, they could increase or decrease in a real situation.)

 

Privacy

Many people don’t know their financial information can be exposed publicly.

Because a probated will is a public document, once it’s filed with a court anyone can inspect the file and get a copy unless the judge seals the file. Getting a copy of the will is easy. Clients simply need to:

  •  Apply to the court in the district where the deceased person lived
  •  Pay a standard fee

 

Segregated fund policies are not disclosed as part of the estate administration process, except in Saskatchewan. Insurance legislation permits life insurers to pay the proceeds of a life insurance policy (the definition of life insurance in all provinces includes annuity contracts and segregated fund policies) directly to a named beneficiary, which means details of the policy are kept discreet.

This privacy advantage is critical for clients who want to keep details of their estate out of the public eye.

 

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