trust or segregated fund? benefits to both! · •testamentary trust may choose its taxation year...

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


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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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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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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


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 issues:

• Will Samantha have sufficient means?

• Can she deplete assets, so Paul’s children are left with nothing

• Probate fees



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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)



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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



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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



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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



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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



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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



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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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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.



Questions? Thank you

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trust or segregated fund? benefits to both! · •testamentary trust may choose its taxation year...

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