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 from one to nine months, or longer if it is 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 is very important to develop a plan that minimizes hurt feelings and family discord.

Failing to consider one or all 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.

The combined effects of time, expenses, privacy and emotions can erode the value of an estate.

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 $1,215,206.

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 — and 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. She 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 of the estate. This helps preserve your confidentiality, allows for a quicker death benefit payout (usually within two weeks 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. 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 a couple of weeks 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 in Sarah’s situation.

Lynn’s privacy, 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 is 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 impacted by a will challenge.¹

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 class²  is named, the segregated fund contract may be protected from creditors while the contract owner is [MW1] 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 the owner’s creditors.³

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 the time to talk to your advisor today and find out whether segregated fund contracts have a place in your estate plan.

1 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. 2 In Quebec, a family class beneficiary is the married or civilly unified spouse, descendants or ascendants of the policyholder. Creditor protection, while alive or after death, is not absolute and may be nullified where a fraudulent settlement or claim for dependant’s relief has been made.

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. The Manufacturers Life Insurance Company is the issuer and guarantor of contracts containing Manulife segregated funds. 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. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the fund facts as well as the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. 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.

MK1938E 05/20

Tax, Retirement & Estate Planning Services Team

Tax, Retirement & Estate Planning Services Team

Manulife Investment Management

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