Protect your legacy: manage four key factors to transfer an inheritance more effectively (Quebec edition)

For residents outside of Quebec, view our national edition

Investment insight

Arranging the smooth transfer of assets to heirs can be a challenge for a few reasons. The first relates to time. Often, settling an estate requires time before instructions can be carried out and your heirs can receive their inheritance, frequently taking up to nine months or longer if it’s contested.

Second, estate fees may significantly erode the value of an estate, diminishing the amount of money your heirs receive. Third, many investors want to protect the privacy of their bequests. Finally, your heirs will likely be dealing with a powerful mix of emotions throughout the estate settlement process. It’s very important to develop a plan that minimizes hurt feelings and family discord.

Failing to consider any 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 help your loved ones receive their inheritance, cost-effectively, confidentially, and with minimum strife.

Combined effects of time, expenses, privacy, and emotions can erode an estate’s value

Let’s look at a specific example. Sarah, a 75-year-old widow, makes a $1,000,000 investment in a non-registered mutual fund today. Four years from now, she passes away at a time when the fair market value has increased by 5% a year to $1,215,506.

Estate fees may vary and depend on the complexity of the estate. Let’s assume that approximately $4,000 must be paid to a liquidator, notary, and accountant to settle Sarah’s estate. So, Sarah’s heirs will receive $1,157,584 — their inheritance will be paid to them months down the road.

Sarah’s heirs, pursuant to her will, are her son and daughter equally. Sarah knows that her daughter won’t be happy to share the estate proceeds with her son because her daughter has been the sole primary caregiver for Sarah while her son has moved away. Sarah is concerned that this may lead to arguments and bitterness between her son and daughter, or even litigation.

Lynn’s legacy

On the other hand, naming a beneficiary other than your estate within a segregated fund contract means that the death benefit will flow outside the estate. This helps preserve your confidentiality, especially when the beneficiaries don’t know the total value of the contract and none of them are the liquidator  (i.e. they may have less access to information about the deceased’s assets). It also allows for a quicker death benefit payout (usually within 10 business days of written notification of death if claims documentation has been provided in good order) and can result in savings of estate administration costs.

For example, let’s say that Sarah’s twin sister, Lynn, chooses to invest $1,000,000 in a non-registered Manulife segregated fund contract and names her two children as equal beneficiaries on the policy. She also dies four years later and her contract’s market value is $1,201,674. This is less than Sarah’s mutual fund because the segregated fund has an incremental cost of 0.3% relative to the mutual fund, reducing its return by that same amount on an annual basis. Her investment bypasses her estate and is paid directly to her beneficiaries.

In Lynn’s case, there are no estate administration-related costs. As a result, Lynn’s beneficiaries receive $1,151,256 (and the associated income taxes on the capital gain are paid by the estate). That’s only $6,328 less than Sarah’s heirs. However, in exchange for this slightly reduced amount, Lynn’s beneficiaries (i.e., her kids) will receive this sum from the insurance company within 10 business days of written notification of death and provision of claim documents in good order. This is much faster than the settlement of an estate and allows her beneficiaries to use the funds however is best for them (e.g., pay down debt, make a purchase, reinvest the funds, etc.) instead of the funds being tied up in the estate like Sarah’s situation.

As long as Lynn’s liquidator isn’t a beneficiary of the segregated fund contract, her privacy1, as well as that of her beneficiaries, should be enhanced, reducing the potential for family disagreements. If a will is challenged, it can delay the distribution of an estate for months, or even years. It can also be very expensive and significantly reduce the value of an estate and what’s left to distribute. This is a real concern for Sarah knowing that her daughter won’t be happy with her share of the estate. A beneficiary designation on a segregated fund contract, on the other hand, is not affected by a will challenge.2

Comparing Sarah’s mutual fund with Lynn’s segregated fund

This table is an illustration of the case described earlier and compares the results of Sarah's mutual fund with Lynn's segregated fund. The table shows rates of return and projected costs associated with each fund. In this example, the segregated fund option offers more to the beneficiaries of the estate. For illustration purposes only. For customized results, refer to the Estate Cost Comparison Tool which is available from Repsource.

For illustration purposes only. Assumes a marginal tax rate of 50%. For customized results, refer to the Estate cost comparison tool.

Segregated fund contracts offer additional benefits. For example, if an irrevocable beneficiary or a beneficiary of the family class3 is named, the segregated fund contract may be protected from creditors while the contract owner is alive. Also, if a beneficiary other than the estate is named and living, the death benefit is paid directly to that beneficiary and is generally beyond the reach of most of the owner’s creditors.4

By incorporating segregated fund contracts into your estate plan, you can better protect the confidentiality of your beneficiaries and help them realize savings. Moreover, the capacity to bypass the estate helps to make sure that assets are transferred quickly and efficiently to loved ones.

Interested in learning more?

For more information on this and other benefits, make time to talk with your advisor today and find out whether segregated fund contracts have a place in your estate plan.

1 After death, notarial wills in Quebec aren’t public. After the testator’s death, only people with an interest in the estate have access to the information contained in it. The same rule applies to non-notarial wills verified by the court. 2 A beneficiary designation can also be challenged, but this doesn’t happen as often because people are often unaware or find out too late to do anything. 3 In Quebec, a family class beneficiary is the married or civilly unified spouse, descendants, or ascendants of the policyholder. 4 Creditor protection, while alive or after death, isn’t absolute and may be nullified where a fraudulent settlement or claim for dependant’s relief has been made.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

Any amount that is allocated to a segregated fund is invested at the risk of the contract holder and may increase or decrease in value.

This communication is published by Manulife Investment Management.  Any commentaries and information contained in this communication are provided as a general source of information only and should not be considered personal investment, tax, accounting or legal advice and should not be relied upon in that regard. Professional advisors should be consulted prior to acting based on the information contained in this communication to ensure that any action taken with respect to this information is appropriate to their specific situation. Facts and data provided by Manulife Investment Management and other sources are believed to be reliable as at the date of publication.

Certain statements contained in this communication are based, in whole or in part, on information provided by third parties and Manulife Investment Management has taken reasonable steps to ensure their accuracy but can’t be held liable for such information being inaccurate. Market conditions may change which may impact the information contained in this document.

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Manulife Funds and Manulife Corporate Classes are managed by Manulife Investment Management Limited.  The Manufacturers Life Insurance Company is the issuer of guaranteed insurance contracts, annuities and insurance contracts containing Manulife segregated funds.

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MK1938E 12/23

Tax, Retirement & Estate Planning Services Team

Tax, Retirement & Estate Planning Services Team

Manulife Investment Management

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