How to Prepare for a Wealth Transfer
May 31, 2023
Did you know that between 2020 and 2030, Canada is poised for over a $1 trillion intergenerational wealth transfer (1)? That’s $1 trillion being transferred from parents to their children and grandchildren. However, all of this comes with some concern as retired Canadians find themselves with a great deal of accessible cash and questions over how to invest and transfer it… soundly.
Let’s take a look at a typical scenario. Alice, 79, lives in the family home where she raised her children Louis and Sandra. She has always been independent, but since the death of her husband a few years ago, she is experiencing loneliness combined with a loss of mobility that have made it increasingly difficult to live on her own. After lengthy discussions with both her children, Alice decided that the time had come to sell her home and move into a retirement facility. In the current real estate market, her house sells for over $500,000 and overnight, Alice finds herself with a significant amount of money to invest. Her wish is to leave the largest possible inheritance to her children, and that the money be passed on quickly and easily in order to avoid conflicts between Sandra, whom she has appointed as executor, and Louis, who might be eager to receive his share. Believing she was doing the right thing, Alice invested her half a million dollars in Guaranteed Investment Certificates (GICs) with her bank which she assumed to be the best solution. After all, she thought, you should buy what you know.
In an alternative scenario Alice meets with Peter (her daughter Sandra’s Advisor) and with both her children, to find a simple way to ensure that her wish is met and, that her funds are transferred to her heirs when she passes. Peter, the Advisor, explains that money held at the bank in GICs is considered part of the estate. Other personal assets like real estate, and even other investment products such as securities and mutual funds are also considered part of the estate. The settlement of an estate can be a long and complex process that can keep funds tied up for months or longer, during which time the executor cannot pay any money to the heirs. This situation doesn’t align with Alice’s wishes, so what are her options?
Peter suggests that she consider investing the money in a segregated fund, a product similar to mutual funds, offered through insurance companies. This solution protects the capital and allows the money to be passed on quickly and easily when the owner passes away, often avoiding conflicts between the heirs, as per Alice’s wishes. But how?
First and foremost, a segregated fund contract allows investors to subscribe to a guarantee for their invested capital, from 75% to 100% on the maturity date and in case of death, ensuring some protection against downturns in the investment market. Depending on the insurer, it is possible to subscribe to such a contract until the ages of 80, 85 or even 90. In addition, some insurers offer the option of protecting investment gains through resets, allowing contract holders to add their gains to their invested capital, locking in a new higher guarantee at a later maturity date. And as with life insurance policies, segregated fund contracts allow for beneficiaries to be named to receive the proceeds at death, bypassing the estate process, and allowing for direct payment within a relatively short time frame.
Alice appreciates having options and will consider what is best for her family.
For similar articles and videos on estate planning and wealth transfer, read/watch Learning From Experience: The Carte’s Story and INFOclip: Transferring Wealth to Future Generations. And please feel free to contact us with any of your questions.
1. Manulife Private Wealth. Preparing your family for the great wealth transfer. Manulife. October 2, 2020.