For those who prefer to transfer an inheritance gradually over time, the most common approach in the past has been to establish a trust – either inside or outside the will – to control the estate after death. Trusts can be a very effective wealth transfer vehicle, but there are some drawbacks that should be carefully weighed, such as cost, complexity and on-going management.
The Annuity Settlement Option
There is now another appealing wealth transfer option available to Canadians, which has considerable merit due to its simplicity and flexibility.
The Annuity Settlement Option from Manulife Investments can automatically transfer the proceeds of your insurance contract or policy upon death, into an annuity. The resulting annuity will then make gradual income payments to your beneficiaries, as specified by you.
It is a simple, inexpensive and effective wealth transfer tool. It provides the advantage of replacing a lump sum death benefit with smaller, scheduled payments while providing savings of legal estate administration and probate fees. In addition, it can provide increased privacy1 and potential creditor protection.
Unlike trusts, which can incur contract preparation costs and annual trustee and accounting fees, the Annuity Settlement Option has no fees or ongoing management requirements. It is a strategy that will appeal to most investors, regardless of whether the amount of the inheritance will be $50,000 or $1 million.
With the Annuity Settlement Option, you have complete control over the specific annuity terms. You can select an annuity that makes payments to your beneficiaries, following your death, for the rest of their lives or for a specific time period.
Guarantee options can also be added to ensure a minimum amount is paid your beneficiaries. This helps avoid a problem with wills that specify an annuity be purchased, but are vague as to the type and terms, often leading to confusion or an undesired result.
If you decide to change the beneficiaries or the terms of the annuity, all you need to do is submit a new Annuity Settlement Option Form (NN1001E) at no cost – instead of having to pay a lawyer to amend or redraft your trust agreement.
And if you have multiple beneficiaries, that’s not a problem. The Annuity Settlement Option allows you to differentiate between beneficiaries, permitting some to receive a lump-sum and others to receive an annuity based on the terms that you select.
What is an annuity?
An annuity is an insurance contract where, in exchange for a single lump-sum deposit, an insurer makes guaranteed regular income payments back to the owner of the annuity. These payments contain both interest and a return of principal component. Annuity payments can continue for a chosen period of time or for the lifetime(s) of one or two people.
You’ve worked hard over the years to ensure your loved ones will be comfortable – both now and after you’re gone. However, your nest egg can disappear very quickly when it is passed on to your beneficiaries. This “sudden wealth” approach to transferring hard-earned savings is a real concern for many people.
Which insurance contracts or policies qualify?
Manulife’s Annuity Settlement Option can be added to:
- Manulife Investments Guaranteed Interest Contracts (GICs),
- Manulife segregated fund contracts, or
- Manulife Financial life insurance policies
Richard and Joan
Richard and Joan have $400,000 invested in a Manulife segregated fund contract, which they want to leave to their son, Scott, in the event of their deaths. But Richard and Joan are concerned about Scott’s ability to manage this money and prefer to have their proceeds, plus future interest, paid out to him over a period of time. After discussing the situation with their advisor, they select a 10-Year Term Certain Annuity Settlement Option on their Manulife segregated fund contract. Now, Richard and Joan have the comfort of knowing their estate will pass gradually to their son over a 10-year period after their deaths.
The Annuity Settlement Option offers many estate benefits:
- Allows you to control the manner in which your assets are allocated to your beneficiaries
- Eliminates the need and cost associated with setting up a formal trust
- Provides an increased level of privacy while avoiding costly probate and estate fees
- Ensures that younger beneficiaries, such as children or grandchildren, receive a controlled income stream, rather than a large lump sum amount
- Provides parents with disabled children a comprehensive estate-planning tool
- Allows you to make changes to beneficiaries and settlement options quickly and without fees
Minors and mentally infirm individuals
The Annuity Settlement Option may also be effective for minor children or mentally infirm beneficiaries. However, instead of naming these people directly as a beneficiary, a trustee – such as a family member – should be named “in trust for” these individuals.
The bottom line
If you don’t want to risk transferring your assets in one large lump sum after your death, you should take the necessary steps now to protect your estate. For those who prefer a highly structured approach, a formal trust should be investigated. If you prefer a simpler approach, the Annuity Settlement Option from Manulife Investments may be just what you’re looking for.
1 In Saskatchewan, jointly held property and insurance policies with a named beneficiary are included on the application for probate despite the fact that these assets do not flow through the estate and are not subject to probate fees.
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. Manulife, the Block Design, the Four Cubes Design, and Strong Reliable Trustworthy Forward-thinking are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.