Segregated funds (‘Seg’ funds for short) are essentially Mutual Funds with guarantees and we all like guarantees don’t we? There are death benefit guarantees and maturity guarantees available in varying amounts (75% or 100%). The better the guarantee, the higher the MER (management expense ratio) but for certain estate planning applications, a Seg Fund is exactly the right choice.
A real life client example scenario:
An elderly farming couple had farmed a lifetime and were proactively preparing for retirement. They had 5 children only 1 of whom was interested in continuing to farm. They sold the bulk of the farmland to a third party freeing up about $750,000 and then ‘sold’ the remaining lands to their farming son which loan he paid over a 5 year period. They also ‘gifted’ the farm equipment to him as an early distribution of his inheritance and to ensure he launched well without being overburdened with debt. It was a win-win.
Shortly after that, the patriarch of the family passed away. His wife was worried that on her death that there could be claims by all children including the farming child, for the cash.
In this case we set up 4 Seg Fund investment contracts of $175,000 each with mom being both the both the owner and beneficiary thus ensuring she maintained full control over the funds for as long as she lived. Each of the 4 children she intended to inherit, would be named a secondary beneficiary. In doing so, each contract’s proceeds would simply payout directly to that adult child on mom’s death.
In the event the child wanted early access to their inheritance they could ask for this from mom without affecting the balance in the siblings’ contract(s). Under this strategy, the family farm proceeds do not need to intermingle with the inheriting child’s marital property (in the event of a divorce) unless the child later chooses to do so by sharing the funds with their spouse &/or family.
The simplicity of this solution ensures the children each inherit the amount they were intended to. This process also ensures the cash flows outside the probate process, is private, quick & fuss free. Although this client intended to distribute the residual of her estate equally amongst the 4 children in this case, with a Seg Fund contract, setting up contracts with differing amounts is fine.
Segregated Funds can absolutely be the right investment strategy for some or all of a client’s wealth depending on the purpose and timeline involved. In this case, Seg Fund investing offers all the benefits of a professionally managed investment including peace of mind that money just can’t buy.