# Segregated Funds



## I'm Howard (Oct 13, 2010)

The scenario is an 80 plus widow with an Estate valued in the several millions of dollars which will be left to three sons.

The proposal to give the monies now has not been accepted, She insists on a will and the proceeds to be distributed after her death.

I have been advised that if She were to talk to an Insurance Agent She could move the assets into a segregated fund, at no cost to Her, and upon her eventual demise the assets would be inherited free of Probate Charges.

Does anyone have experiance with such an action, is it in the Estates best interests??


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## MoneyGal (Apr 24, 2009)

The Canadian Life and Health Insurance Association has a very basic brochure on segregated funds that you can access here.

Whether this is an optimal move or not depends on a couple of factors, not least of which is fees. You/she/whoever is handling this should compare the fees on the product vs. the likely probate fees avoided. 

In Ontario, for example, the estate administration tax is 1.5% on assets in excess of $50K (and 0.5% on the first $50K). How does that compare to the guarantee fees for the products being considered? 

Most seg funds have total MERs in the range of 3.5%. What is she paying now on the assets? 

If she lived another 10 years (for example) and paid a 3.5% MER on her assets in seg funds to avoid a 1.5% tax on a declining balance, is that the optimal solution?


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## I'm Howard (Oct 13, 2010)

Money Gal, many thanks.

Assets are mainly Bonds and GIC's, She would pay whatever Probate charges, which looks much cheaper than the Insurance charges.

Best course seems to be leave As Is.


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## kcowan (Jul 1, 2010)

It is amazing to me how insurance salesmen talk about saving probate fees when they will stick you with all manner of fees. Similarly they will talk about tax savings when they ignore the high MERs of their investment product offerings.

Wherever you can, stick holdings in an investment account that enables the naming of a beneficiary (RRSP, TFSA) to avoid probate fees and let the will sort out the fairness.


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## Henry (Jul 12, 2009)

If the assets are in the millions, then it might make sense to look at alter ego trusts.

Benefits:
No probate fees
Privacy of asset transfer (does not go through will and estate)
Reduction in personal taxable income to qualify for benefits like OAS 

Costs:
Trust fees
Taxed at the highest marginal tax rate

Segregated funds are not ideal due to high fees. Insurance agents get a 5% upfront commission on selling segregated funds. If there is 5 million in assets, you are paying 250,000 in upfront commissions to the agent.

A good high net worth adviser may be able to assist in the situation with the help of the brokerage's accountant and estate lawyer if you are seeking advice or opinion. Do not talk with an insurance agent.


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## MoneyGal (Apr 24, 2009)

Henry said:


> If the assets are in the millions, then it might make sense to look at alter ego trusts.


This requires a disposition at current market value triggering any accrued capital gains payable now, as well as the higher taxation going forward. 

Again, if this is a strategy ONLY to avoid probate, the NPV of just keeping things as they are now is almost certainly higher (in most provinces) than the NPV of moving everything over to an alter ego trust. 

It's worth costing it out mathematically but I'd be very surprised if this strategy provided a net benefit to the client. In addition, there is a non-financial cost associated with making changes, principally that the client has to be comfortable with making the changes and operating under the new structure for the rest of her life.


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## OhGreatGuru (May 24, 2009)

I'm Howard said:


> The scenario is an 80 plus widow with an Estate valued in the several millions of dollars which will be left to three sons.
> 
> The proposal to give the monies now has not been accepted, She insists on a will and the proceeds to be distributed after her death.
> 
> ...


I suspect the insurance cost is going to be pretty high at her age. It may appear to be "at no cost to her", but it will paid for in fees out of management of the assets.


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## Henry (Jul 12, 2009)

> This requires a disposition at current market value triggering any accrued capital gains payable now, as well as the higher taxation going forward.


This is not true. Alter ego trust is a special kind of inter vivos trust only available for people who are 65 years and older and no accrued capital gains are triggered. You are thinking about a regular inter vivos trust.

Given that the money that we are discussing is in the millions, it is most likely that a significant amount of income are already being taxed at the highest marginal tax rate. Also it is not necessary to put all the assets into alter ego trusts. So it may make sense form a tax perspective to keep some of the assets under the person's name so that it will be taxed at a lower rate and the assets can go into testimonial trusts after the person's death. Testimonial trusts are taxed at a progressive tax rate just like a regular person's tax schedule without the personal exemption amount.

I read that it is possible to put the alter ego trust into a tax jurisdiction that is taxed at a lower rate such as Alberta. Therefore, there might be tax savings if the person is residing in Ontario (46% highest marginal tax rate) and the alter ego trust is located in Alberta (39% highest marginal tax rate). There are fancier ways for estate planning that are available to wealthy families. A good high net worth adviser and brokerage estate lawyers will be able to provide important advice for estate planning.

Last not least, the key benefit for the alter ego trust is privacy not probate fees.


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## MoneyGal (Apr 24, 2009)

Crumb. You are completely right. I was remembering the pre-2001 rules, before the ITA was changed to permit the rollover of assets with no deemed disposition. 

I agree if that the value is truly in the millions, alternate strategies are worthwhile. I assumed the estate would include property as well and the investable assets would be some fraction of that total, but I have no real basis for making that assumption.


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