The Easiest Way to Transfer Money to the Next Generation
How to Transfer Money to the Next Generation in a Tax Advantaged Manner
Combining the growth opportunities of an investment fund with the potential security of an insurance contract. A segregated fund (seg fund) is an investment, a type of insurance product, and estate planning tool all in one. Here’s a quick rundown of the basics.
A seg fund is a type of investment that lets you participate in the markets. Like mutual funds, seg funds pool investors’ money together. Pooling creates economies of scale to give you investment opportunities that might not be available to you as an individual investor.
Seg fund products also have an insurance component and are formally referred to as individual variable insurance contracts. The insurance component of the contract provides additional features like estate planning advantages, potential creditor protection, and death benefit and maturity guarantees that can help protect your initial investment against market drops.
Estate planning advantages Because your seg fund contract is a type of insurance contract, you get to name a beneficiary (or more than one) who receives the fund assets as an inheritance when you pass away. The money in the fund bypasses your estate and goes directly to your beneficiary without going through probate — the legal process that certifies a will and transfers assets to heirs. Here’s why that’s such a good thing:
Speed — It can take six to 12 months to settle an estate, longer if there are court delays. With segregated fund contracts, the money is usually paid within two weeks.
Lower costs — Bypassing the estate means avoiding accounting, legal, and administration fees, as well as probate. These fees can add up quickly.
Privacy — Wills may become public documents and the information in them can easily get out. Segregated fund contracts are private.
Protection — Having the death benefit bypass the estate offers potential protection from estate creditors and court challenges to a will.
Control — Some seg fund contracts let you specify how you want the wealth paid — as a lump sum or gradually over time. This is called the annuity settlement option.
Your investment options Just as with mutual funds, you can choose from equity, fixed income, and balanced seg funds, as well as managed portfolios that give you professional asset allocation. And, like mutual funds, you can choose to hold seg funds in a non-registered account or a tax-advantaged registered plan:
Registered Retirement Savings plan (RRSP)
Tax-free Savings Account (TFSA)
Retirement Income Fund (RIF)
Locked-in Retirement Account (LIRA)
Life Income Fund (LIF)
A specialized segregated fund RESP contract can be useful to people who are saving for a child’s education.
Your advisor will work with you to help you choose the type of investment and plan that’s right for you based on your goals and life stage. Keep in mind that, like all investment options, there are costs associated with segregated fund contracts. These include but are not limited to management fees, insurance fees, operating costs, and sales tax. Some contracts may also include a charge for early withdrawal.
Speak to your advisor if you’d like more information on how segregated funds can help you take advantage of market growth, protect your wealth, and pass it on to the next generation.