Some clients who ask for a trust don’t need one, says Jos Herman, founder of Resources & Solutions Professional Corp., an insurance and estates consulting firm. She told an audience at the Independent Financial Brokers of Canada’s annual virtual conference Wednesday that client needs could be met with segregated funds and carefully planned beneficiary designations.
A client can designate their spouse as a successor owner and annuitant of a non-registered segregated fund and their children as beneficiaries, Herman said. The policy continues to be in force and there’s no deemed disposition at death of the first spouse.
It allows clients to pass assets to beneficiaries in a controlled manner while still maintaining ownership when they’re still alive, Herman added. Segregated funds can act as a “quasi-trust structure” and provide benefits that non-registered mutual funds can’t.
As insurance products, segregated funds can be simpler when the beneficiary is a non-resident of Canada. Traditionally, executors must withhold non-resident tax of gross income distributed to the non-resident and open a withholding tax account with the Canada Revenue Agency. But segregated fund proceeds go directly to the beneficiary, bypass the estate and don’t have withholding tax.
Proceeds from a segregated fund can also be distributed over time to beneficiaries who aren’t trusted to handle large lump sums, Herman said. Beneficiary settlement options let policyholders decide which beneficiary gets a lump sum and who gets a payment stream over time.
Registered accounts
Clients routinely name their spouses as beneficiaries of their TFSA, but miss the opportunity to name them as successor holders, Herman said.
That additional step allows the spouse to move TFSA dollars from the deceased’s account to the survivor’s TFSA account in an exempt contribution, allowing tax-free growth of the full amount to continue, she added.
Similarly, clients can name their spouse as a successor annuitant in their RRIF to avoid immediate tax consequences at death, Herman said.
And, when someone converts their RRSP to a RRIF, the beneficiary designation doesn’t carry over, so advisors should remind clients to update that information at the time of conversion.