How some financial products can keep more money in the family.
Settling an estate can be a time-consuming and costly exercise. And after working hard your whole life, you want to ensure your legacy is passed to your heirs in the most efficient and cost-effective way possible. This is where segregated funds and guaranteed interest contracts (GICs), financial products sold by an insurance company, can come in handy. By letting you name a beneficiary, these products help keep more of your money in your family, among other things.
How it works
When you name a beneficiary, an insurance company is obligated, under the Insurance Act, to pay any death benefit proceeds directly to the named beneficiary, instead of to the estate. The advantages of direct payment to the beneficiary include avoiding potential delays in settling the estate, as well as bypassing probate and other administrative fees. These administrative, accounting and legal fees could add up to an additional five per cent or more, depending on the complexity of the estate.
What is probate?
Simply put, probate is an approval process that validates your will and gives its executor the authority to do their job. Probating a will or estate is not free – the fees are calculated based on the size of your estate and they vary between provinces.
Market risk and liquidity
Settling an estate can take months or even years, especially if the will is challenged or if there’s any other estate litigation. During this time, any investments may be frozen and exposed to the risks of the market (such as a market correction). However, any death benefit proceeds for a named beneficiary are usually paid within two weeks of receipt of the proper documentation, greatly reducing exposure to market risk.
This puts money in the beneficiary’s hands quickly, to use as they wish, for example to pay down debt, make a purchase or reinvest the funds. Having only a portion of your estate with an insurance company can provide beneficiaries with much-needed cash, alleviating the stress of having to pay any outstanding expenses and incoming bills while they wait for other funds from the settlement of the estate.
Potential creditor protection
When non-registered assets are paid by financial institutions other than insurance companies, they usually flow through the estate. Assets in an estate may become vulnerable to the deceased’s creditors. For beneficiaries, this could mean a substantially smaller inheritance. Having the death benefit proceeds bypass the estate offers potential protection from estate creditors.
Control over payments
You can control how and when your beneficiaries receive the money. By using the annuity settlement option in a segregated fund to automatically transfer proceeds upon death into an annuity, you can specify scheduled payments to the beneficiaries.
Ease the burden on the executor
While being an executor can be very rewarding, it’s also a big responsibility that comes with the risk of personal liability. By having assets dealt with outside of your estate so your executor doesn’t have to manage them, you can ease the burden and reduce the risk for your executor. This article and video offer more information on the role of an executor.
Probate is a matter of public record, so avoiding it helps to preserve confidentiality, while payments made by insurance companies are generally a private matter. This can be especially helpful in situations when you do not want to disclose your wishes to other family members.
Speak to your advisor today. An advisor can help you determine whether a segregated fund or GIC is suitable for your situation, as well as help ensure you have a solid estate plan that meets your needs.
The benefits of bypassing probate
Probate fees vary by province. Click on a province below to see an example of how these and other fees might apply to your situation.
Prince Edward Island
Newfoundland and Labrador
For illustration purposes only. Costs will vary depending on the province, complexity of the estate and length of time the assets were held in the contract.
 The probate process and fees do not apply in Quebec. There is a verification process for non-notarial wills but not for notarial wills.
 In Saskatchewan, jointly held property and insurance policies with a named beneficiary are included on the application for probate but do not flow through the estate and are not subject to probate fees.