Understanding Segregated Funds vs. Bank held Funds

In my work with clients, I find so much misinformation has been internalized as truths, simply because someone “in authority” has told them something. Let me give you an example.

Yesterday I met with one of my clients who lost his wife about 2 years ago and who just turned 70 years of age. He told me that his banker had suggested he transfer his RSP’s and other non-registered investments to the bank so as to make things easier for his executor to pass onto his beneficiaries. His RSP’s and non-registered funds have been invested in segregated funds with two different insurance companies for over 15 years, where they’ve been shielded from creditors if something were to happen to his company. The rates of return have met or exceeded the benchmarks every year except for one. His investments now total about $1,850,0000. His wife’s estate is still being Probated as she received a sizable inheritance shortly before she died. 

Segregated Funds vs. Bank held Funds

If my client transfers those funds currently held in the insurance companies’ segregated funds, to the bank, he loses the following: 

1. They will no longer be creditor proof.
2. There will no longer be any guaranteed account value.
3. The funds would have to pass through Probate before they could be dispersed, which means that it could take a year or more before his children receive their inheritance.

I explained to my client that if he moves the investments from the segregated funds to the bank, his estate costs, just on those funds would be approximately $150,000, due to: 

1. the executor fees for the Will.
2. the accounting/legal fees to probate the Will.
3. the Probate taxes on the Will. 

Protecting Your Investments using Segregated Funds 

I explained to my client that if he leaves the funds in the segregated funds, his beneficiaries would receive their inheritance within 30 days of his death because they would not have to go through Probate. 

In addition to that, I reminded the client that he has access to tax and estate accountants and lawyers, who at no cost will meet with him to help design the most effective way to handle his entire estate, especially when he receives his wife’s proceeds. He could then take that information to his own professionals who would then set up what is needed to be put into place. This of course would reduce the billable hours that his outside professionals would charge. 

After this, my client asked me if these same benefits of the segregated funds would apply to his TFSA. I told him yes and so my client has directed me to begin the process of moving those funds from the bank and placing them into segregated funds.