Benefits of Segregated Funds

In the world of financial planning, we match the investment product with the purpose and intention for the funds being used.

The investment universe is vast, and connecting product and purpose takes careful consideration and asking the right questions:

■ When is access to the funds required?
■ What is the need for the initial investment to be guaranteed or protected?
■ Who will receive the money if you are gone?

One of the often-overlooked investment options available is segregated funds. Similar to mutual funds, they are both pooled contributions from investors that are managed by professional investment managers and can be held in a variety of different accounts (RRSP, TFSA, non-registered).

Only offered by insurance companies, segregated funds provide additional benefits such as guarantees on principal, potential creditor protection, and the ability to name beneficiaries on all types of accounts, including non-registered funds.

Guarantees on principal and reset options on segregated funds are topics all on their own and won’t be explored here, though I note that the management fees to secure those benefits and features make the investment more expensive than regular investment funds. Segregated funds with limited guarantees are priced very similarly to mutual funds.

Let’s explore some of the other benefits segregated funds provide, and the estate planning and risk management characteristics that may meet your financial planning needs.

Estate and probate efficiency

A common scenario where segregated funds may be used is to expedite estate settlement.

Let’s take the example of a non-registered investment account, where you can name a beneficiary, as this is an insurance product. Remember, it’s not possible to name a beneficiary on a non-registered account unless it is an insurance product.

When the account owner dies, the account will be efficiently distributed as per the beneficiary designations named on the account.

The account will not be required to pass through probate, resulting in quicker settlement, and funds will not be subject to the 1.4% probate fee (the current rate in BC).

Small business owners

A small business owner wants to protect and separate personal assets from potential creditors should their business face bankruptcy or legal liability.

Holding personal assets in a segregated fund contract through an insurance company allows them to name a beneficiary on the account. They would need to name a spouse and/or children as beneficiaries to potentially protect those personal assets from creditors – a “qualified beneficiary.”

Of course, creditors can apply to the courts for review and the case would be subject to a decision made by a judge. Piercing creditor protection of insurance products is exceedingly rare.

It is important to note, if the company was already in financial distress or facing litigation at the time they put the contract in place, the protection may not apply. Protection also doesn’t apply to taxes owed to the Canada Revenue Agency in cases where bankruptcy is not involved.

In cases where personal assets are shielded, only business assets would be subject to claims.

It is always best to consult with a financial advisor and lawyer to set up the appropriate structure.

Protecting wishes and the privacy of your estate

Our last case involves a client who wishes to protect the privacy of their assets at death.

When the estate is probated, the contents of the will become part of the public record in the province the deceased last resided. Therefore, anyone can request and see the details of that will, including names of beneficiaries, and how assets were valued and distributed.

The fact that segregated fund contracts bypass the will and probate process allows those assets to be excluded from any public record, protecting the privacy of the deceased and beneficiaries, and avoids potential challenges of your wishes.

This is useful not only to protect individuals but also charities someone may wish to gift to upon their death.

In all cases, it is important to ensure your last will doesn’t contradict any beneficiary designations you may assign through a segregated fund contract, leaving your assets open to be contested.

Summary

Having an in-depth discussion with an advisor can help you make the right choice of investment vehicle.

Comparing investment objectives and management fees the fund charges is only the beginning.

Doing a more fulsome comparison of your objectives and a cost comparison over your lifetime can help you make better-informed decisions to protect your assets while alive and efficiently pass your wealth to the next generation. ■