Welcome to Soundbites, weekly insights on market trends and investment strategies brought to you by Investment Executive and powered by Canada Life.

For today’s Soundbites, we’re talking about segregated funds with John Yanchus, director of tax and estate planning with Canada Life. We talked about the unique characteristics of seg funds and how they address privacy concerns. And we started by asking him about the current resurgence in interest in seg funds.

John Yanchus (JY): I think the general state of the economy is behind this resurgence. There is a lot of uncertainty with the market these days and I think the rise in interest rates tend to allow people to explore more guaranteed-type investments. Many of these investments are fixed-income investments and mainly earn interest income, which is taxed at the top tax rate. A segregated fund offers several reasons that make it such a great solution in many situations:

  • the ability to have a portion of the investment earning other types of income, such as dividend income and capital gains, which are taxed at lower rates;
  • the ability to be invested in the market and not restricted to fixed-income type investments; and finally
  • death-benefit guarantees and maturity guarantees of either 75% or 100% provide the safety net in these uncertain times.

What seg funds offer that mutual funds or GICs don’t.

JY: They give you the freedom to invest, while offering insurance protection to preserve your savings. They provide very similar investment options as mutual funds provide. And they are also included within managed solutions. Segregated funds offer several benefits above and beyond what mutual funds and GICs offer:

  • they provide options and solutions when exploring the estate side of the conversation;
  • they offer clients privacy and the ability to remain discreet;
  • they deal with control issues and offer different ways beneficiaries can receive their inheritances;
  • they deal with creditor protection; and
  • they have very simple tax reporting and offer the ability to report capital losses.

Estate and probate implications.

JY: Segregated funds provide the ability to name a beneficiary for registered and non-registered accounts. This named-beneficiary designation allows money to flow directly to the beneficiary, which avoids the estate, and therefore avoids the probate process if ultimately required. The same named-beneficiary designation is also the element that provides potential creditor protection. Creditor protection may arise where the relationship between the named beneficiary is either the spouse, child, grandchild or parent of the life insured. And this also includes an irrevocable beneficiary designation. This is true for all common-law provinces. A lawyer should be consulted to find out more about current legislation and case law in their particular province.

The privacy element.

JY: When an estate goes through the probate process, the will becomes a public document. Any individual can go to their local courthouse and seek these public documents for a small fee. A segregated fund policy is a contract between the owner and the insurance company. No other parties are privy to the contents of that policy. Any instrument that utilizes a named beneficiary should not be addressed in the will, as this can cause other issues.

The nimble manner in which seg funds can be paid out and to whom.

JY: A segregated fund death benefit is generally paid out within five to 12 business days after notification of the death, which is a much shorter time frame than the one-year average from an estate. Another huge benefit in estate planning is the ability to name a beneficiary and potentially determine how that money will be paid to that beneficiary. All life insurance products, including segregated funds, can utilize a settlement option, which allows the owner to pay the death benefit to a beneficiary in the form of either a life annuity, a term-certain annuity, a lump sum or any combination of those three. This allows different planning options and the ability to plan for various scenarios or life stages our beneficiaries may be at. The settlement option could be changed by the owner any time while living and of sound mind. It is a one-page form in addition to the beneficiary designation, so it’s very, very easy to implement.

And, finally, what’s the bottom line on seg funds?

JY: I think segregated funds are a very flexible investment. I am a true believer that we have the ability to plan whatever outcome we desire. We just have to figure out how to achieve that. In many cases, a segregated fund can accomplish our goals and desires.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to John Yanchus of Canada Life.

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