Estate-planning opportunities using insurance investment contracts

Investment insight

With an insurance investment contract, various people play an important role in determining how the contract will work. This offers numerous estate-planning opportunities, including the ability to bypass an estate and the inherent administration, delay, and costs. However, failing to properly set up your contract may result in your intentions not being fulfilled and the contract not working like you intended. Let’s look at a few scenarios.

Successor annuitant or Joint Life for non-registered contracts

The annuitant is the measuring life of the contract. Consequently, if there’s only one annuitant named, on the annuitant’s death, the contract ends and the proceeds are paid to the beneficiary.

For example, let’s assume you’re both the owner and annuitant of a contract and have named your spouse as the beneficiary of the contract. Your intention is that on your death, your spouse will have the choice to continue the contract as the owner and annuitant or receive the death benefit payout. This strategy would work if the contract allowed for spousal continuation. However, your spouse wouldn’t be given this choice and would receive the death benefit payout. Furthermore, since the contract has ended, it would be a taxable disposition with any gain being included on your final tax return.

To make sure that the contract continues tax-free to your spouse, name your spouse as the successor owner and successor annuitant, or the Joint Life, if applicable. The beneficiary should be who you want to receive the death benefit payout after the death of you and your spouse.¹

Let’s look at another example. You’re both the owner and annuitant of a contract and have your spouse named as the successor owner but have failed to name a successor annuitant or Joint Life. On your death, the contract will end and there’ll be a taxable disposition with any gain being included on your final tax return. Again, to make sure that the contract continues to your spouse on a tax-free basis on your death, name your spouse as the successor owner and successor annuitant, or the Joint Life, if applicable.

Successor owner for non-registered contracts

Where the owner isn’t the annuitant, or where the owner is the annuitant and a successor annuitant or Joint Life has been named, you should consider whether a successor owner for the contract should be named.

For example, let’s assume you’re both the owner and annuitant of a contract and have named your spouse as the successor annuitant. Your intention is for the contract to continue after your death with your spouse as the new owner and annuitant. While the contract will continue with your spouse as the successor annuitant, ownership won’t transfer directly to your spouse. Rather, the contract will continue with your estate as the owner and ultimately will be administered according to the terms of your will. To make sure that the contract passes to whoever you want the new owner to be, make sure that person is also named as the successor owner. This way the contract is transferred directly to the successor owner, avoiding your estate, estate creditors, and the delays and costs of administering your estate.

For contracts with the Joint Life payout option, this may not be an issue. If the owner is either the annuitant or the Joint Life, the surviving spouse will become the owner of the contract, unless otherwise designated. This allows the contract to continue tax-free to your spouse as owner, unless a successor owner had been named.

Another example is where you’re both the owner and beneficiary of a contract and have named your spouse as the annuitant because your spouse meets the maximum age requirement, but you don’t.

If you die first, then on your death, ownership of the contract will transfer to your estate and be dealt with according to the terms of your will. If your spouse dies first, then on your spouse’s death, the contract will end, as a successor annuitant wasn’t named. While the death benefit will be paid to you, there’ll be a taxable disposition with any gain being included on your tax return.

If this isn’t your intention, but instead you want the contract to continue in the event of your death or your spouse’s death, then your spouse should be named as the successor owner and you should be named as the successor annuitant. The beneficiary should be whoever you want to receive the death benefit proceeds on the last of you and your spouse’s death.¹

Note, this solution isn’t possible with the Joint Life payout option as the latest age to deposit is based on the older of the annuitant and Joint Life’s age.

Be cautious of joint ownership

A common mistake is to set-up the contract with you and your spouse as joint owners, with one of you as annuitant and your children as beneficiaries. The intent is to have the contract continue on the death of you or your spouse. However, if the annuitant spouse dies first, the contract terminates and the proceeds would be paid to your children as beneficiaries. The surviving spouse receives nothing. This is further complicated if your children are minors because they can’t disclaim ownership of the funds.

A potential solution may be for you to be owner and annuitant, and to name your spouse as the successor owner and successor annuitant, or Joint Life where permitted, with your children as named beneficiaries.² This way, the contract ownership stays with the survivor of you and your spouse, and only after both of you pass away is the death benefit paid to your children.

If you truly want joint ownership, another alternative would be to have you and your spouse as joint owners, one of you as annuitant, the other as successor annuitant, and the children, for example, as beneficiaries. This would work the same as above, but keep in mind that where a contract has multiple owners, all the owners must agree with every change or transaction.

Joint Life payout option

With the Joint Life payout option available in some Manulife segregated fund contracts, there are different rules depending on taxation type.

Let’s assume you decide to purchase a Manulife PensionBuilder contract with the Joint Life Payout Option. You’ll be the owner and annuitant; your spouse will be the Joint Life and your intention is to have your children receive the death benefit payout on the death of both you and your spouse. In trying to decide whether to purchase the contract with a registered retirement savings plan (RRSP), registered retirement income fund (RRIF), or non-registered funds, you wonder what the correct contract set-up in each situation would be.

With your RRSP contract, you would be both the owner and annuitant and name your spouse as the Joint Life and sole primary beneficiary. You wouldn’t name a successor owner since the contract terminates on your death. At this point, your spouse will have the option to either receive the death benefit or continue the contractual benefits in a new RRSP or RRIF.

With your RRIF contract, you’d again be the owner and annuitant with your spouse named as the Joint Life. You wouldn’t name a successor owner because the contract will continue on your death and your spouse will automatically become the new owner. The primary beneficiaries would be your children, and they’d receive the death benefit when both you and your spouse have died.

If using non-registered funds, you’d be the owner and annuitant and name your spouse as the Joint Life and successor owner.³ If you die first, the contract will automatically continue in your spouse’s name as the successor owner. Again, the primary beneficiaries would be your children who’d receive the death benefit when the last of you and your spouse have died.¹

Summary

Whether you’re setting up a new contract or reviewing your current one, take the time to understand the implications of contract set-up to help make sure things work as you intend. Having the right contract set-up will also allow you to take advantage of the significant estate-planning opportunities available with insurance investment contracts. Refer to “Insurance Investments: The Facts” (login required) for more information on these types of contracts.

Note that if the spouse takes over ownership of the contract, the spouse can change the beneficiary designation unless the beneficiary is named irrevocably. 2 If the assets belong to both you and your spouse, you could split the assets and set up two contracts this way, alternating which of you is named as owner and annuitant, and successor owner and successor annuitant or Joint Life, where applicable. 3 While naming a successor owner is recommended, in this situation, you don’t need to name your spouse as successor owner because if the owner is either the annuitant or the Joint Life, the surviving spouse will become the owner of the contract, unless otherwise designated.

The commentary in this publication is for general information only and should not be considered investment or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value. Age restrictions and other conditions may apply. The Manufacturers Life Insurance Company is the issuer of the Manulife PensionBuilder insurance contract and the guarantor of any guarantee provisions therein. Manulife, Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license. 

MK2526E 03/21

Tax, Retirement & Estate Planning Services Team

Tax, Retirement & Estate Planning Services Team

Manulife Investment Management

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