Protect your legacy:
Take advantage of segregated
funds to empower your bequests

Arranging the smooth transfer of assets to heirs can be a challenge for a number of reasons.
The first relates to time. Often, probate is required before a deceased's instructions can be carried out and their beneficiaries receive their inheritance - and the process of obtaining probate can be a lengthy one, frequently taking between three to nine months.

Second, probate and estate fees may significantly erode the value of an estate, diminishing the amount of money beneficiaries receive. Third many investors want to protect the privacy of their bequests, but the probate process leaves the details of an estate open to public scrutiny. In addition to disclosing one's financial assets, this may expose beneficiaries to fraud and provoke conflict among loved ones.

Finally, your heirs will likely be dealing with a powerful mix of emotions throughout the estate settlement process. It is very important to develop a plan that minimizes hurt feelings and family discord.

Failing to take into account one or all of these four factors - time, expenses, privacy and emotions - may lead to unnecessary delays, financial consequences and disputes. However, there are steps you can take to ensure that your loved ones receive their inheritance quickly, cost-effectively, confidentially and with a minimum of strife.

SARAH'S SITUATION
Let's look at a specific example. Sarah, a 70-year-old widow, makes a $200,000 investment in a regular mutual fund today. Two and a half years from now, she passes away at a time when the fair market value has declined by 10%. Her investment is now worth $180,000. Because Sarah bought the fund units using the deferred sales charge (DSC) option, her investment will be charged 4.5% on the value of her original deposit - or $9,000 - in fees.

Probate and estate fees vary by province and depend on the complexity of the estate. Probate fees vary from nil to 1.5% of the value of the estate, while executor, lawyer and accountant fees may range from 1.0% to 5.0% (see chart). The management expense ratio (the cost of investing) of many segregated funds, meanwhile, falls into the 2.5% to 3.5% range - considerably lower than the 7.0% combination of average probate and estate fees as shown in the chart below.

 
Range
Average
Probate fee
0% to 1.5%
1.0%
Executor fee

1.0% to 5.0%
2.0%
Lawyer fee
1.0% to 5.0%
2.0%
Accountant fee
1.0% to 5.0%
2.0%
TOTAL
7.0%

VS.
2.35%-3.10% Segregated Fund Mangement Expense Ratio (MER)

Let's assume that the probate fees on Sarah's estate will cost about 1.0%, and a further 2.0% must be paid to each of an executor, an estate lawyer and an accountant. Together, those expenses add up to about 7.0%, or $11,970.

So Sarah's beneficiaries will receive just $159,030 - or just under four fifths of her original investment. Their inheritance will be paid to them months down the road. And, because the will becomes part of the public domain through probate, heirs may end up arguing among themselves about what was given to whom.

 

LYNN'S LEGACY
On the other hand, naming a beneficiary directly within a segregated fund contract means that the death benefit will flow outside of your estate and avoid probate. This preserves a client's confidentiality, allows for a quicker death benefit payout - usually within 2 weeks of written notification of death, and can result in significant savings to an estate. For example, let's say that Sarah's twin sister Lynn chooses to invest $200,000 in GIF encore, series 1, a segregated fund, and names a beneficiary(ies) on the policy. She, too, dies two and a half years later. Her investment bypasses probate and the insurance company, as a matter of policy, waives the DSC. Furthermore, Lynn's deposits have a minimum 100 death benefit guarantee, so any drop in fair market value won't affect the amount her beneficiaries receive. The death benefit guarantee is reset each year to the greater of::

• 100 of the deposit value plus 4 simple interest (if the annuitant is under age 80), or
• The market value, or
• The previous year's guarantee value

This means the amount guaranteed in the event of death will increase.

In Lynn's case, this amounts to a total of $216,000 (her $200,000 deposit plus $16,000 in simple interest). That's approximately $57,000 more than Sarah's $159,030, and Lynn's beneficiaries should receive this sum from the insurance company within a couple of weeks of written notification of death. Also, Lynn's privacy as well as that of her beneficiaries' will be protected from the curiosity of strangers

ARE YOU EXPECTING TO GIVE OR RECEIVE
AN INHERITANCE?

 
Sarah's Mutual
Fund Investment
Lynn's Segregated
Fund Investment
Original Investment
$200,000
$200,000
Fair Market Value in Third Year
$180,000
$180,000
Value of Death Benefit "Top up"
N/A
$20,000
Increase in death benefit guarantee in two years
N/A
$16,000
Deferred Sales Charge Fee (4.5%)
-$9,000
N/A
Probate and Estate Fees (7.0%)
-$11,970
N/A
Net Proceeds
$159,030
$216,000

 

and other heirs, reducing the potential for financial abuse by unscrupulous individuals and family disagreements.

WHAT ARE THE
OTHER BENEFITS OF
THIS STRATEGY?

Beyond the death benefit guarantee and potential to bypass probate, segregated funds offer several other compelling advantages for investors who are developing estate plans.

First, segregated funds offer a maturity guarantee (for example, 75 or 100 of the deposit value) that states as long as the investment is held to term (usually 10 years), the insurance company will pay out the greater of the current market value or the maturity guarantee (proportionately reduced for withdrawals)
- even if the fair market value has dropped in that time. So if Lynn has a 100 maturity guarantee and maintains the contract for the full 10-year period defined in her contract, her $200,000 investment is still protected.2

Segregated funds also allow investors to diversify into a range of actively and

passively managed funds that provide exposure to Canadian and international securities in various asset classes. This can be important for older Canadians who could benefit from investment growth yet want to retain much of their portfolio in fixed-income investments.

 

INTERESTED IN
LEARNING MORE?

By incorporating segregated funds into your estate plan, you can protect the confidentiality of your beneficiaries and help them realize significant savings. Moreover, the simple interest feature on the death benefit guarantee offered by the GIF encore segregated funds makes these insurance products competitive with GICs in today's low interest rate environment. And the death benefit guarantee and capacity to bypass probate ensure that more assets are transferred to loved ones - which is often the most important objective of many estate plans.

Make the time to talk to your investment advisor today to find out whether segregated funds have a place in your estate plan.
1 Applicable only to the death benefit. Not available on any market value or maturity benefits.
2 Deposits made (to 100% guaranteed funds) during the final 10 years of the contract have a 80% maturity guarantee.

With you every step of the way.™