As numerous Canadians transition from the accumulation phase of their lives to retirement planning and beyond, the question arises: What strategies are most advantageous for them? Both advisors and their clients are finding Segregated Funds to be an increasingly appealing choice, particularly when it comes to estate planning.
Older investors might gravitate toward Seg funds because they can “facilitate the protection and efficient transfer of wealth in a cost-effective manner,” says Raymond Yates, senior financial advisor at Save Right Financial Inc. in Vaughan, Ont.
Segregated funds are exclusively offered by licensed insurance advisors. They share similarities with widely popular mutual funds, encompassing a diverse range of asset classes. However, what sets them apart is the insurance contract wrapper, which offers a range of valuable estate-planning advantages.
One of the biggest benefits is that SEG Funds have guaranteed investment and death benefit values that are unaffected by stock market conditions, says Prem Malik, financial advisor at Toronto’s Queensbury Securities Inc. As such, the minimum value transferred to a beneficiary for estate-planning purposes is known.
In fact, the potential benefits can be even more substantial when higher values are locked in within the duration of the insurance contract. This is due to the typical feature in segregated funds that resets the guaranteed value of the insurance contract, both in terms of maturity and the maturity date itself, on each anniversary date or at less frequent intervals.
Usually, guarantees offered by segregated funds span from a 75% to 100% payout of the principal upon maturity or in the event of death. The maturity period, often correlated with the payout level, typically falls within the 10 to 15-year range. It's important to note that costs may increase in tandem with the extent of the guarantee.
“For my clients, the most important benefit is the guaranteed principal at maturity,” says Dawn Zhang, financial advisor with Citistar Financial Services Ltd. in Vancouver.
She says most of her clients emigrated from Asia, bringing the assets they had accumulated over half their lives. For them, “security of their assets is a top priority.”
Mr. Yates says another major benefit of Segregated funds for estate planning relates to probate. The value of the insurance contract of a deceased policyholder can be paid directly to a named beneficiary without going through probate. That avoids paying probate fees, which can be substantial depending on the size of the estate, as well as legal and administration fees.
The ability to name a beneficiary can be very advantageous for estate planning if a policyholder wishes to have different seg funds and names specified beneficiaries for each. Heather Holjevac, financial planner at Holjevac Financial Group in Mississauga, says this “provides peace of mind that assets will be distributed according an individual’s wishes.”
One example in which this strategy can be useful is if a policyholder has children from a previous marriage and wants to ensure that children from that marriage have a share in his or her legacy, says Ms. Holjevac, adding that “children from a previous marriage can be disadvantaged in the division of probated assets.”
Another benefit of seg funds is that they can provide potential protection from creditors in the event of bankruptcies or lawsuits. Mr. Yates says that creditor protection is especially beneficial for business owners who wish to safeguard their personal assets. Still, creditor protection can be challenged if a fund was knowingly purchased at a time when the policyholder was experiencing financial difficulties.
Ms. Holjevac says that one of the fringe benefits of using seg funds for estate planning is that they facilitate privacy. The proceeds from a fund are not part of a probated will, which is part of public record. “Some individuals do not want their private affairs to be public.”
Segregated fund fees are generally higher when compared to mutual funds with similar investment objectives. Tim Prescott, President of Quadrus Investment Services Ltd., a subsidiary of Canada Life, notes that industry-wide fees have seen a reduction in recent years. However, it's important to avoid evaluating these fees in isolation. Prescott suggests that investors should view segregated funds in terms of the overall value they offer, taking into consideration not only the fees but also the cost of the insurance contract, which provides the sought-after guarantees for investors.
Mr. Prescott contends that some investors only look at the value of guarantees relative to the equity market as the singular benefit of seg funds. By working with an advisor, he feels investors can participate in the additional features that this solution can provide as part of balanced portfolio.
Mr. Yates suggests that for estate-planning purposes, different features of Segregated funds appeal to different investors. But at the end of the day, he says, “it’s the peace of mind provided by segregated funds that matters.”
If you are interested in investing in Segregated Funds, call us directly at (709) 634-0071 at our Corner Brook location.