Segregated funds: an often-overlooked option for estate planning

Segregated funds may be a lesser-known option for estate planning, but they’re versatile instruments for clients with specific concerns, says John Yanchus, a tax and estate planning consultant with Canada Life.

A segregated fund is an insurance contract issued by a life insurance company. Seg funds have two parts: a pooled investment component (similar to a mutual fund), plus an insurance policy that protects against the loss of the invested capital when a contract matures. By law, a seg fund must guarantee a return of at least 75% of the original capital, and many provide guarantees for 100%. Seg funds are defined as life insurance policies under the Income Tax Act.

Yanchus said segregated funds have numerous advantages over other investments in an estate-planning context — particularly when it comes to avoiding probate and protecting privacy.

“They can provide the ability to determine how your beneficiary gets paid,” he said. “You can bypass the estate, and bypass probate. You can take advantages of liquidity and timing of the payment, protect those funds from creditors, and also accomplish your philanthropy goals, all in one action.”

When it comes to privacy, clients may not realize that wills are considered public documents, and anybody can obtain a copy for a small fee. Segregated funds, on the other hand, generally do not become public documents.

“Your affairs will remain private,” he said, but noted that in Saskatchewan, the provincial government must be made aware of life insurance policies and segregated funds that are handled by an estate executor.

Charitable donations can also be easily accommodated and dispersed through seg funds by naming a charity as the beneficiary of the policy.

Yanchus, who called seg funds one of estate planning’s best kept secrets, added that seg funds can allow the owner to name up to 20 beneficiaries.

He also explained that a seg fund can be structured as an annuity, allowing a beneficiary to receive scheduled payments instead of a lump sum after the insured dies.

Yanchus said estate planning can be a complicated process, and without a clear plan for avoiding pitfalls, clients usually end up creating more headaches than they solve.

“I think of probate planning as one of those areas where clients willfully engage in self-destructive hell,” he said. “Many, many people love the idea of avoiding probate. The problem is they lack the knowledge on which avenue to use.”

Yanchus said that using seg funds’ beneficiary designations can be quite powerful.

“You have the ability to name the estate, if that’s where you want the funds to flow for liquidity purposes. Or you have the ability to pass these assets outside of the estate, thereby avoiding probate, avoiding contestation, and avoiding other potential creditors of the estate,” he said.

“It’s almost a way to control from the grave.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.