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

For residents outside of Quebec, view our national edition

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 9 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 4 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.

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 $5,000 must be paid to a liquidator, notary, and accountant to settle Sarah’s estate. So, Sarah’s heirs will receive $1,156,733 — 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.

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 4 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 $5,478 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 (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

_{For illustration purposes only. Assumes a marginal tax rate of 40%. 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

What if in our example Sarah dies after 3 years and her mutual fund investment has declined by 10% so the investment value is $900,000? All the associated fees would still apply, but they would be lower since the market value of her investment would also be lower. Additionally, any capital loss realized on the deemed disposition at death could be used to generate tax savings. Capital losses in the year of death can be used to offset any capital gains in that same year. If there are excess capital losses they can potentially be used to reduce capital gains from the previous 3 years or reduce other income for the year of death and/or the year before death. Taking that into account, Sarah’s beneficiaries will receive $917,100.

Let’s compare that with Sarah’s twin sister Lynn who wants to protect the value of her investment and chooses a segregated fund with a 100% death benefit guarantee (proportionally reduced for withdrawals). As a result, we’ll assume the incremental cost of the segregated fund increases to 0.8% (instead of 0.3% in the original example).

If Lynn passes at the same time as Sarah, the value of her investment is $877,813 in our example, which is less than Sarah’s mutual fund. However, Lynn’s beneficiaries will receive the full $1,000,000 due to the 100% death benefit guarantee⁵. We assume there would be no additional tax cost or savings since the capital loss at death would be offset by the death benefit top-up, which is treated as a capital gain, resulting in no taxable income. The result is that Lynn’s beneficiaries receive $82,900 more ($1,000,000 - $917,100) and take advantage of all the other benefits previously mentioned.

Comparing Sarah’s mutual fund with Lynn’s segregated fund – decline in value

For illustration purposes only. Assumes a marginal tax rate of 50%. 

By incorporating segregated fund contracts into your estate plan, you can better protect the confidentiality of your beneficiaries and help them realize savings. A segregated fund contract with a 100% death benefit guarantee can also protect the value of your beneficiaries’ inheritance in case the value of the investment declines.⁶ Moreover, the capacity to bypass the estate helps to make sure that assets are transferred quickly and efficiently to loved ones.

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. 5 For this example we assume that Lynn did not make any withdrawals. 6 Some segregated fund contracts allow for the death benefit guarantee to reset at a higher amount if the fair market value is higher than the current death benefit guarantee on a particular date.