Trust or Segregated Fund?
Benefits to Both!
Cheryl Norton, B.Comm., CA
Regional Director, Retail Tax & Estate Planning
2013
Confidential Restricted – Not to be disclosed beyond authorised roles within Standard Life group or authorised third parties
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Tax advisor for your large client files
Introducing…
Cheryl Norton, CA
Senior Tax Advisor • Joined Standard Life May1st, 2012
• Extensive background in Canadian
Corporate and Personal Taxation
2 This document is for advisor use only and is not intended for distribution to the public
Confidential Restricted – Not to be disclosed beyond authorised roles within Standard Life group or authorised third parties
3
Agenda for today…
1. High level review of Trusts
2. What do Segregated Funds offer
3. Case Studies
4. Probate
5. Nominee Accounts
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4
Trust - Defined
• Relationship between settlor, trustee & beneficiaries
• “Settlor” transfers property to another person “trustee”, to hold
for the benefit of one or more persons “beneficiaries”
• Does not have the status of a legal person like a corporation
• More like a partnership, obligations outlined in a trust document
or deed
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How is a Trust taxed?
• Income can be taxed in the trust as a separate taxpayer, or
allocated out to beneficiaries and taxed in their hands
• Only taxed once – either as trust income or beneficiary income
• After income is taxed in a trust, it forms part of the trusts capital
• No double tax when distributed
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Tax - Detail
• Taxed as an individual
• Testamentary trust may choose its taxation year end. Taxed on
a graduated tax scale.
• Inter vivos trusts must apply the highest federal & provincial
personal tax rates
• “Estate Period” considered to be a separate trust. ITA 104(1)
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Two Primary Types of Trusts
• Inter vivos trust – Living trust, often established to hold certain
investment properties for the benefit of children or other family
members
• Testamentary trust – Established on death, dictated by a will,
individual may direct an executor to establish a trust
• Others – Commercial trusts (Mutual Funds, REITS etc.)
Spousal, Alter Ego
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Trust Benefits
• Potential to access an additional set of graduated tax rates
• In estate freeze transactions an inter vivos trust can hold
common shares for children (especially if minor children
involved)
• Income splitting – paying attention to anti-avoidance rules. Most
beneficial is that there is no attribution on capital gains to a
minor child
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Trust Benefits
• Vehicle to manage property for persons who cannot manage
their own affairs
• Control beyond the grave
• Savings tool to divide large estates, also useful to keep persons
from receiving an estate in one lump sum
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Spousal Trusts
• No 21 year deemed disposition rule (waived for first 21 year
anniversary)
• Usually set up for spouse to receive income and preserve
assets for future distribution to children
• Upon death of spouse, property is deemed sold at FMV and tax
is paid
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Confidential Restricted – Not to be disclosed beyond authorised roles within Standard Life group or authorised third parties
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What is a Segregated Fund
• An individual variable insurance contract aka : an investment
product offered by insurance companies with guarantees
• Alternative to mutual funds
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Seg vs Mutual Fund
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MUTUAL FUND
SEGREGATED FUND
Potential Creditor Protection (1) No* Yes
Death Benefit Guarantee No Yes
Maturity Guarantee No Yes
Probate Fee bypass(2) No 3 Yes
Estate Fees reduction(2) No 3 Yes
Privacy No Yes
Avoid Wills Variation Act No Yes
Quick proceeds disbursement at death No Yes
Non-registered Successor Annuitant No Yes
(1)Since there are some circumstances where creditor protection may not apply, it is recommended that clients consult a legal advisor to find out if they are eligible for this kind of protection. With appropriate beneficiary designation.
* Bankruptcy and Wage Earner Protection provides some creditor protection for RRSPs and RRIF in case of an unforeseen bankruptcy.
(2)Not applicable in Quebec as notarial wills do not need to be probated by the court and for non-notarial wills, probate fees are nominal.
(3) Unless the contract is registered
This document is for advisor use only and is not intended for distribution to the public
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The parties
Contractholder
Contingent Contractholder
Annuitant
Successor Annuitant
Beneficiary
&
Contingent
Beneficiary
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The parties
Policyholder - The owner
Contingent Policyholder – Becomes policyholder upon death of
policyholder and any additional (joint) policyholder
Annuitant – The person insured under the policy
(Contingent) Successor Annuitant – On death of annuitant, successor
annuitant becomes the annuitant
Beneficiary – Will receive payout at death of annuitant(s)
Contingent Beneficiary – On death of annuitant(s), will receive payout
if the first beneficiary is already deceased
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Ask what the client really wants…
Seg funds give the ability to name beneficiaries
Problem – not a lot of room to expand or elaborate, but you need to do
so where appropriate!
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Gradual Inheritance Concept
What?
The Gradual Inheritance Concept provides a simple and effective
way to ensure that the inheritance your clients leave for their
beneficiaries lasts as long as they want it to.
Who?
For clients who want their beneficiaries to receive a gradual
income stream instead of a lump sum payment upon their
death. For example:
Spendthrift beneficiaries
Minors/Financially dependent individuals
Yearly charitable giving
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Case studies
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The RRIF and the second marriage
The facts:
• Paul (age 85)
• RRIF mutual fund assets of $1,300,000 at stock brokerage firm – Samantha is
designated as beneficiary
• Second marriage
• Two children from first marriage
• Samantha (age 71)
• No children
• No independent means (has only OAS)
Stated desire:
• Paul wants Samantha to have income for as long as she lives
• At her death, RRIF assets are to go to Paul’s children
• Possible guarantees
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The RRIF and the second marriage
The issues:
• Will Samantha have sufficient means?
• Can she deplete assets, so Paul’s children are left with nothing
• Probate fees
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The RRIF and the second marriage
A proposed solution:
• Transfer assets to a segregated fund contract
• Can avoid probate with named beneficiary (also true if still in
Mutual Funds)
• 75% death benefit available (100% had Paul been less than
age 80)
• Name Paul’s children as irrevocable beneficiaries
• Irrevocable beneficiary designation will survive Paul’s death
• Insert specific language as part of designation
• Specify maximums that may be withdrawn without Paul’s
childrens’ consent
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Exposed business assets
The facts:
• Stephen (age 55) operates an unincorporated business with
significant potential liability issues
• He has a spouse (Anna) and 2 children (both responsible
adults)
• He received a $500,000 bequest from his mother, which he
invested in a segregated fund policy, naming his spouse as
sole beneficiary
Stated desire:
• To build an estate to leave for his spouse and children
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Exposed business assets
What happened next:
• Stephen and Anna died in a plane crash – don’t know who died first
The outcome:
• The segregated fund assets form part of Stephen’s estate – thus
exposed to claims of any creditors
What might Stephen have done?
• At a minimum, contingent beneficiaries should have been considered
• If circumstances where there is not a simultaneous death, having
Anna as successor annuitant is beneficial – Anna would have stepped
in shoes of deceased (i.e., contract would have continued)
22 This document is for advisor use only and is not intended for distribution to the public
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The less-than-responsible child
The facts:
• Ellen (age 79)
• Currently has $500,000 of mutual fund assets
• Ellen lives frugally, so additional savings are being generated
• She has a less-than-responsible divorced daughter Anna (currently
age 50) who doesn’t manage assets well
• Anna is also concerned about capital preservation
• Anna has two sons, neither of whom are minors
Stated desire:
• Provide life-long income to her daughter
• Remaining assets are to go to Anna’s two sons
23 This document is for advisor use only and is not intended for distribution to the public
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The less-than-responsible child
What happened next:
• A segregated fund contract was opened - A 100/100 contract was acquired
• Anna was named as beneficiary, with two sons as contingent beneficiaries
• The Annuity Settlement Option (aka Gradual Inheritance Concept) was
acquired
A life annuity with a Life Cash Refund option is to be acquired
Outcome:
• Ellen can deposit additional amounts into contract, with 100% death benefit
guarantee being available
• Life annuity will be acquired for Anna – she cannot receive a lump-sum
• If there is any guarantee remaining at the time of Anna’s death, it will form
part of Anna’s estate
If Anna wishes to name specific beneficiaries, she will have to
complete an annuity application at time of annuity acquisition
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The Basics - Taxation
• Segregated funds are trusts that must allocate all the income they earn.
• Standard Life allocates income (notionally) monthly and a T3 is issued at year-end
• T3 reflects income earned from:
• Capital gains and losses incurred by the underlying funds
• Capital gains and losses incurred by unit redemptions / transfers in/out
• Eligible Canadian Dividends
• Non-eligible Canadian dividends and foreign dividends
• Interest income
• Foreign income
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The Basics – Other
• It is generally accepted that maturity benefits receive capital treatment
as do death benefits
• In theory if there is a “top up” amount, there should be a corresponding
capital loss carry forward to offset the gain
•Leveraging could be considered for appropriate clients
•Interest paid on loans used to acquire a segregated fund contract is tax
deductible
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Corporate Owned Segregated Funds
• Payout at death is not fully credited to the Capital Dividend Account
(CDA) – even though insurance in nature
•Only 50% of capital gains/losses flow through CDA
•Corporation should be the beneficiary – risk of shareholder benefit rules
applying if not, resulting in double taxation
•Amount of holdings should be monitored where there is a desire to
claim the $750K Capital Gains Exemption
27 This document is for advisor use only and is not intended for distribution to the public
Confidential Restricted – Not to be disclosed beyond authorised roles within Standard Life group or authorised third parties
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Seg vs Mutual Fund
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MUTUAL FUND
SEGREGATED FUND
Potential Creditor Protection (1) No* Yes
Death Benefit Guarantee No Yes
Maturity Guarantee No Yes
Probate Fee bypass(2) No 3 Yes
Estate Fees reduction(2) No 3 Yes
Privacy No Yes
Avoid Wills Variation Act No Yes
Quick proceeds disbursement at death No Yes
Non-registered Successor Annuitant No Yes
(1)Since there are some circumstances where creditor protection may not apply, it is recommended that clients consult a legal advisor to find out if they are eligible for this kind of protection. With appropriate beneficiary designation.
* Bankruptcy and Wage Earner Protection provides some creditor protection for RRSPs and RRIF in case of bankruptcy. (2)Not applicable in Quebec as notarial wills do not need to be probated by the court and for non-notarial wills, probate fees are
nominal.
(3) Unless the contract is registered
This document is for advisor use only and is not intended for distribution to the public
Confidential Restricted – Not to be disclosed beyond authorised roles within Standard Life group or authorised third parties
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Techniques for Excluding Assets from
Probate
Designations made in insurance contracts:
Life insurance & critical illness
Annuities (including Term Funds)
Segregated Funds
Do testamentary trusts avoid probate?
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More Cases…
Small Estates
Large Estates
Charity
Can take more than a year for an estate to settle
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Why not put all Estate Assets into
Segregated Funds?
Tax still needs to be paid on terminal tax return
Wills still important
Trusts are still beneficial
31 This document is for advisor use only and is not intended for distribution to the public
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Nominee accounts and creditor protection
• Nominee accounts are still IVIC so some benefits such as
guarantees are available
• Creditor protection in Québec is established by the link between
the owner (ie IRROC dealer) and the beneficiary – therefore it
is clear creditor protection is lost in Québec
• Other common law provinces: link for creditor protection is
between annuitant (insured) and beneficiary: so there is some
possibility of creditor protection – although no case law exists
on the topic – therefore no certainty either.
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Nominee accounts and estate planning
• Probate bypass:
• Nominee application is clear:
• Registered plans: proceeds of death paid to « Distributor in
trust for owner » - not sure if probate bypass is possible
• Non-registered: since we name a beneficiary in the plan it is
possible that probate bypass can apply
• Gradual Inheritance Concept:
• Registered plans: not applicable
• Non-registered plans: can apply since you can name a
beneficiary on the application
33 This document is for advisor use only and is not intended for distribution to the public
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How I can help…
•Large cases > $250,000 full access for tax queries
•How to structure tax efficiently to meet client needs
•Tax knowledge for all Standard Life investment products
•Over 10 years of experience with corporate and personal
structures, including life insurance
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Confidential Restricted – Not to be disclosed beyond authorised roles within Standard Life group or authorised third parties
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Standard Life
Standard Life plc is a leading long-term savings and investment company headquartered
in Edinburgh, Scotland. Standard Life has around 6 million customers worldwide and
operates in the United Kingdom, Europe, North America and Asia Pacific, and globally with
Standard Life Investments Ltd.
In Canada, Standard Life has been doing business for almost 180 years. Standard Life
Financial Inc., which wholly owns The Standard Life Assurance Company of Canada and
Standard Life Mutual Funds Ltd., is Standard Life plc's largest operation outside the UK.
With about 2,000 employees, it provides long-term savings, investment and insurance
solutions to more than 1.4 million Canadians, including group benefit and retirement plan
members.
As of December 31, 2011, Standard Life plc had C$314 billion in assets under
administration, including C$41 billion in Canada through Standard Life Financial.
This document is intended for general information only. It should not be construed as legal, accounting, tax or specific investment
advice. Clients should consult a professional advisor concerning their situations and any specific investment matters. While
reasonable steps have been taken to ensure that this information was accurate as of the date hereof, The Standard Life Assurance
Company of Canada and its affiliates make no representation or warranty as to the accuracy of this information and assume no
responsibility for reliance upon it.
This document is for advisor use only and is not intended for distribution to the public
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Questions? Thank you
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