How Segregated Funds Can Help and Tax & Estate Tips and Traps

John Natale, B.Comm., LL.B.Head of Tax, Retirement & Estate Planning Services, Wealth

AGENDA

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Topic 1Estate Planning

Strategies

Topic 2Contract Set Up Fundamentals

Topic 3Value of Naming a

Beneficiary & Estate Cost Calculator

Topic 4Case Study: The “Kitchen Sink” Strategy

ESTATE PLANNING STRATEGIES

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Choose beneficiaries carefully

Spouse1 or spousal trust: assets that have appreciated in value, RRSP/RRIF/TFSA*

Other beneficiaries: other assets (eg. cash, Guaranteed Interest Contracts (GICs), money market funds)

May provide authority for executor to decide based on taxation

1 The terms spouse and spousal includes a spouse or common-law partner as defined by the Income Tax Act (Canada).* Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), Tax Free Savings Account (TFSA)

Assets At Death

Tax “Unfriendly”

Assets

Tax “Friendly”

Assets

Spouse Child/other

Gifting Assets

To Beneficiaries Prior to Death You know who you want to receive them

Confident won’t need assets

Consider tax implications

To Charity Donations made in will = tax credit for estate

Donating marketable securities = 0% capital gains inclusion Be careful with seg funds name charity as successor

owner – NOT beneficiary

Wills & Failing to have a one

Wills:

Cornerstone of estate plan – facilitate administration of estate

Potential tax planning, appointment of executors and guardians

Approx 50% of Canadians don’t have a will

If no will:

Subject to intestacy rules and gov’t decides who gets your money

Courts select estate administrator(s) and guardian(s) of minor children and their property

Incur additional costs and delays in distribution of estate and forego tax planning

Common-law partners???

Lost opportunity to ensure your assets go to people you intended in manner you desired

POAs also very important

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Intestacy Example in Ontario

Janice passes away with $1,000,000 of assets & no will Janice has a spouse (Joe) and 2 children (Jack & Jill)

Estate$1,000,000

Jill$266,667

Jack$266,667

Joe$466,666

$200,000 preferential share + 1/3 of $800,000

1/3 of $800,000

1/3 of $800,000

Do it yourself wills

Handwritten (holograph) wills and do-it-yourself wills (stationary) can be dangerous: If unclear or don’t comply with statutory requirements often

found invalid May fail to fully appreciate tax/legal considerations Saunders v Vautier, Ashton court cases Multiple wills and marriage may revoke a will (in some prov.) Provision to exclude income on inheritances from equalization

upon a marriage breakdown Executor compensation

Wills are not expensive and are worth the cost

CONTRACT SET UP FUNDAMENTALS

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Remember…

Owner: The party to the contract that is tax reported

Successor Owner: The replacement owner of the contract, after the death of the original owner

Annuitant: The “measuring life” of the contract If annuitant dies, contract ends (absent a successor annuitant)

Successor Annuitant: Replacement “measuring life” of the contract Contract continues on death of the original annuitant

Beneficiary: Party who receives death benefit upon the death of all annuitants

VALUE OF NAMING A BENEFICIARY & ESTATE COST CALCULATOR

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The Value of Naming a Beneficiary

Bypassing the Estate can help provide: Protection from creditors of the Estate Protection from challenges to the will Probate* and estate administration fee savings Quick wealth transition More private transfer of wealth

* 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. * In Quebec, there are no probate fees.

Manulife’s Estate Cost Comparison Tool

Custom illustration based on clients’ personal scenario

Interactive tool; illustrates the estate savings of using a segregated fund or mutual fund

Produces a sleek report to leave behind with clients

Shows how lower fee segregated funds offer similar estate cost savings as higher cost products, while offering the potential of leaving your clients’ beneficiaries with a greater inheritance

Helps explain that the value of segregated funds goes beyond the financial benefits and it is not always about the guarantees

Manulife’s Estate Cost Comparison Tool

Manulife’s Estate Cost Comparison Tool

An example of Manulife’s Competitive MERs

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Sell it how you like Difference in MER covers segregated fund guarantees and benefits

* MERs as at December 31 2018 and include HST.

Fund/Pool NameInvestmentPlus MER* (Advisor)

%

Underlying Manulife

Mutual Fund MER*

(Advisor) %

MPIP Segregated Pool MER*

(FE) %

MPIP Investment Pool MER*(Advisor) %

Manulife Strategic Income Fund/Manulife Global Fixed Income Private Pool

2.24 2.00 1.78 1.41

Manulife Yield Opportunities Fund/Manulife Balanced Income Private Pool

2.44 2.20 2.20 1.90

Manulife Strategic Balanced Yield Fund /Manulife U.S. Balanced Private Pool

2.58 2.27 2.29 1.99

Manulife Global Balanced Fund/Manulife Global Balanced Private Pool

2.64 2.36 2.33 2.04

Manulife Dividend Income FundManulife Dividend Income Private Pool

2.76 2.29 2.43 2.06

Manulife U.S. All Cap Equity Fund/ Manulife U.S. Equity Private Pool

2.92 2.32 2.40 2.08

Where to access the tool

From Repsource main page (unsecured)

Under Tools & Illustrations

CASE STUDY: THE “KITCHEN SINK” STRATEGY

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Background

Jane, age 75, elderly mother of three adult children & one grandchild

Jane has cash of $1 million from sale of house and moving into retirement home

Jane is in relatively poor health & is non-insurable

She just learned about the estate planning benefits of segregated funds but her son Ben is not convinced and acts like he “knows his stuff”

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Jane’s beneficiaries

3 Children: 40 Year Old Son, Ben Trustworthy, “Caretaker”, Executor,

Power of Attorney

37 Year Old Daughter, Susan Lives in New York City Non-Resident of Canada

35 Year Old Daughter, Nancy Spend thrift Common law husband (“tricky” Ricky)

1 Grandchild: 12 Year Old Granddaughter, Julia Daughter of Nancy

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Issues

Jane – wants a quick, private wealth transition, doesn’t believe all of her children should share equally in her estate, wants some control after death & fears will may be challenged

Ben – eldest child & decision maker, isn’t fully convinced segregated fund is the best investment choice but as executor wants to minimize fees & work associated with settling the estate

Susan – eldest daughter, is a non-resident of Canada

Nancy – youngest child, is a spend thrift & her common-law husband (“tricky”) Ricky is not trustworthy

Julia – granddaughter, is a minor (age 12), not to receive any income until she is 25

Estate – who is going to pay the tax bill at death?

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Solution

The “Kitchen Sink” Strategy with a segregated fund contract

Ability to address the issues at hand through one contract

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The “Kitchen Sink” Strategy

$1,000,000 Segregated Fund Death

Benefit

$400,000Lump Sum

Benefit$300,000

Lump Sum Benefit

$200,000 Annuity

Settlement

$100,000 Annuity

Settlement

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30% Susan:Non-Resident

40% Ben:Executor

20% Nancy:Spendthrift

10% Julia:Minor

Issues resolved – Jane

Quick and private transition of wealth to children as beneficiaries

Avoids will challenges

Ability to designate specific percentages so death benefit is paid out to each beneficiary as to her wishes

Ability to exert control after death with Annuity Settlement Option

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Delayed Payments & Privacy – Rob Ford’s estate

Rob Ford estate file shows $1.1 million in assets — and no indication of any payout to widow and children*

“Rob Ford’s widow sues Doug Ford, alleging he has deprived her and her children of millions”

“Records also show that Renata Ford has taken out several mortgages on the family home in the two years since Rob Ford

died.”

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* Donovan, Kevin "Rob Ford estate file shows $1.1 million in assets — and no indication of any payout to widow and children" TheToronto Star, June 6, 2018

Issues resolved – Ben (Caretaker/executor)

Death benefit bypasses the estate

Avoids probate and associated fees and delays with settling estate

With seg funds all taxable events reported

No need to withhold & remit non-resident withholding tax for payment from estate to non-resident sister (Susan)

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Issues resolved – Susan (Non-Resident)

An estate with beneficiaries living outside of Canada could present challenges as distributions of property to non-residents potentially involve a number of additional tax issues Requirement for the executor to withhold non-resident tax of 25% of the gross income distributed to non-

residents of Canada, unless the beneficiary resides in a country that Canada has a tax treaty with (15% in the case of U.S.)

Where the owner of a non-registered contract is a Canadian resident, the tax liability on death will be included in their final Canadian tax return. Capital gain or loss will be reported to the owner on a T3 tax slip

The beneficiary (Susan), in any country, will receive the gross proceeds with no tax withheld.

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In the news – Real life example

Family's $500K inheritance seized by U.S. border officials

An Ottawa man acting as executor of a will says xxxx gave him "faulty advice" to mail $500,000 in bank drafts to family members in the U.S. — a move that caught the attention of U.S. border officials, who seized the money.

Executor David Saikaley and family members were worried they may never see their inheritance.

After almost a year later and a CBC news story, the money is finally being released by US border officials.

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Burke, Ashley "Family's $500K inheritance seized by U.S. border officials" CBC News, July 19, and August 4, 2018

Issues resolved – Nancy (Spendthrift)

Annuity Settlement Option

Structured payment stream Non-commutable Non-assignable

Cost-free

A cheaper alternative to a simple trust

Works with non-resident beneficiaries, although we typically do not sell to non-residents

Original owner has the option of naming "the beneficiary for the beneficiary” Ability to control wealth transfer to Julia (grandchild) to ensure

common-law husband (Ricky) doesn’t receive any funds if Nancy passes away before guarantee period end date. Specify a trustee while a minor.

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Annuity settlement option

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Issues resolved – Julia (Minor)

Annuity Settlement Option – Deferred Annuity

On the ASO form add payment deferral instructions in a separate addendum signed and dated:

Annuity payments to commence on the death of the last annuitant/life insured or when the beneficiary turns 25, whichever is later.

Specify a trustee on the ASO form (on the bottom of section 2) in case Jane dies before Julia reaches the age of majority and an annuity needs to be set up at that time.

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Issues resolved – Estate tax

What if there is no cash / assets inside the estate to pay the tax? In the case of an RRSP or a RRIF, there are specific provisions in the Income Tax Act (ITA) (160.2(1) and

(2)) that deal with this kind of problem (money going to beneficiary but tax liability staying with estate). These provisions impose a liability on the beneficiary for the tax.

There is no specific provision in the ITA that deals with the non-registered situation. Plan for the tax liability because CRA will not just walk away (without a fight) from taxes owing and may go after the

executor.

Solution: Place some of the funds ($50,000) in a separate investment. Financial institutions generally do not require probate on assets under certain thresholds (i.e. $50,000 - $100,000).

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Helping your business

Marketing piece to provide to clients MK1670 – Protecting your nest egg after you’re

gone MK1164 – Insurance Investments – the Facts MK2371 – The Value of Naming a Beneficiary MK1836 – Tax Advantages of Manulife Segregated

Fund Contracts MK1919 – When to consider the RRIF successor

annuitant or joint life option

FINAL THOUGHT

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Now here’s a man who understands women…

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Disclaimers

This presentation 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.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value.

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.

The commentary in this presentation 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.