How You Can Use Segregated Funds to Mimic a Family Trust

As you look to achieve peace of mind and minimize financial worries, you will want to consider how to control your assets after your life, in order to provide a secure future for the people you care about. Let’s explore the power of segregated funds to help you safeguard your assets, dictate who receives them, and simplify the distribution process. If you have considered setting up a family trust, seg funds may work similarly but with added advantages. Let’s examine how these investment funds offer greater control, ensure unequal inheritance and privacy, and streamline the distribution of your estate.

Trusts and Segregated Funds

In Canada, a trust is a distinct legal entity that is set up to manage assets for the benefit of another person. The individual responsible for establishing the trust is known as the settlor; the trustee assumes the role of managing the trust on behalf of the beneficiaries. Trusts can be created either during the lifetime of the settlor, referred to as an inter vivos trust, or upon the settlor's death, known as a testamentary trust. During the formation of the trust, the settlor transfers their assets into it at fair market value. The trustee disburses income or assets to the beneficiaries, who pays the taxes, as instructed or as needed. In this way, a trust can allow you to direct income and control your assets, even after your life.

A segregated fund, which is a variable annuity offered by insurance companies, shares certain characteristics of a family trust. Although it can provide creditor protection in some situations, the main purpose here is to provide restrictions on the access and timing of fund withdrawals. In the following section, we will explore three examples where segregated funds serve functions similar to those of a family trust, but at a lower cost. Notably, opting for a segregated fund eliminates the expenses you would incur when establishing a trust and your annual requirement to file taxes on behalf of the trust. Further, you would have the flexibility of modifying the segregated fund contract as needed, without incurring any extra charges.

Greater Control of Assets and Income

Consider a scenario where parents intend to leave an inheritance for their children. However, they may have valid reasons for not wanting to provide a lump sum of cash or grant full ownership of an investment account. Factors such as a child's young age, disability, or personality may make them ill-suited to handle the financial responsibility. Alternatively, the parents may wish to safeguard the funds from the spouse of an adult child. Similar to a trust, a segregated fund maintains control of the asset with the owner. This enables them to provide a steady stream of income to the beneficiary while restricting access to the capital itself. Alternatively, a segregated fund can be established with an irrevocable beneficiary designation, preventing the owner from withdrawing funds without the beneficiary's explicit consent. This feature proves particularly useful when gifting an investment account. Lastly, by selecting an annuity settlement option, the segregated fund can generate income for the lifetime of the beneficiary while preserving the capital, ensuring it remains inaccessible.

Unequal Inheritance and Privacy

Let's explore another example where a blended family consists of children from previous marriages. In such cases, a segregated fund contract can be tailored to allocate varying amounts to different beneficiaries. This allows each spouse to prioritize their own biological children, ensuring a distribution of assets in accordance with their wishes. This approach is equally applicable to families where one child assumes the responsibility of managing the family business or farm, while the remaining siblings inherit monetary funds or investments. Notably, segregated fund assets hold a distinct advantage as they are not considered part of the estate. Instead, they seamlessly and privately pass directly to the designated beneficiary, shielded from public scrutiny. As a result, each beneficiary remains unaware of the entitlements of others, only informed of the amount they personally receive.

Simplifying and Speeding the Distribution of the Estate

The third example relates to the executor's role. The probate process, known for extending over months or even years, introduces significant delays in the distribution of assets. A responsible executor, cognizant of their duties, refrains from dispersing assets until the completion of probate and the resolution of tax obligations. This cautious approach inevitably prolongs the inheritance process and extends the executor's workload. However, with segregated funds, matters are resolved simply and speedily. The named beneficiary of a segregated fund can expect to receive funds in under a month. Similar to trusts, segregated funds circumvent the probate process, streamlining the executor's responsibilities and expediting the distribution of assets.

While trusts undoubtedly serve as a valuable mechanism for handling family wealth in specific circumstances, segregated fund contracts are a compelling alternative in numerous scenarios, offering comparable benefits at a reduced cost. Using segregated funds in these ways can save you time and effort with lawyers, accountants, and trustees. This simplifies and reduces the cost of your estate plan, and simplifies management for both you and your executor.

On our website, you can find more articles about estate planning and other financial topics. If you have questions about this article or would like a conversation about how these ideas apply to your unique situation, call us at 403-290-0940.