Protecting your nest egg

Protecting your nest egg By Bruno Scanga Financial Columnist You have worked hard over the years to make sure their loved ones will be comfortable—both now and after they’re gone. However, a nest egg can disappear very quickly when it’s passed on to the beneficiaries. This “sudden wealth” approach to transferring hard-earned savings is a real concern for many people. For those who prefer to transfer an inheritance gradually over time, the most common approach in the past has been to establish a trust—either inside or outside a will—to control the estate after death. Trusts can be a very effective wealth transfer vehicle, but there are some drawbacks that should be carefully weighed, such as cost, complexity, and ongoing management. Annuity settlement option There’s another appealing wealth transfer option available to Canadians, which has considerable merit due to its simplicity and flexibility. The annuity settlement option can automatically transfer the proceeds of your client’s insurance contract or policy into an annuity upon their death. The resulting annuity will then make gradual income payments to the named beneficiaries. It’s a simple, inexpensive, and effective wealth-transfer tool. It provides the advantage of replacing a lump-sum death benefit with smaller, scheduled payments while offering savings of legal, estate administration, and probate1 fees. In addition, it can provide increased privacy2 and potential creditor protection. Unlike trusts, which can incur contract preparation costs and annual trustee and accounting fees, the annuity settlement option has no fees or ongoing management requirements. It’s a strategy that’ll appeal to most investors, regardless of whether the amount of the inheritance will be $50,000 or $1 million. With the annuity settlement option, you have complete control over the specific annuity terms. Select an annuity that makes payments to their beneficiaries for the rest of the beneficiaries' lives or for a specific time period following the client’s death. Guarantee options can also be added, guaranteeing potentially up to and even exceeding 100% of the initial investment, to help protect against market volatility and make sure a minimum amount is paid to beneficiaries. This helps avoid a problem with wills that specify an annuity be purchased but are vague as to the type and terms, often leading to confusion or an undesired result. If you decide to change the beneficiaries or terms of the annuity, all you need to do is submit a change form with the annuity carrier. There is no cost to you or of them having to pay a lawyer to amend or redraft their trust agreement. And if there are multiple beneficiaries, that’s not a problem. The annuity settlement option allows your clients to differentiate between beneficiaries, permitting some to receive a lump sum and others to receive an annuity based on the selected terms. A definition to share with clients An annuity is an insurance contract where, in exchange for a single lump-sum deposit, an insurer makes guaranteed regular income payments to the owner of the annuity. These payments contain both interest and a return of principal component. Annuity payments can continue for a chosen period or for the lifetime of one or two people. Richard and Joan—an example Richard and Joan have $400,000 invested in a segregated fund contract, which they want to leave to their son, Scott, in the event of their deaths. But Richard and Joan are concerned about Scott’s ability to manage this money and prefer to have the proceeds and future interest paid out to him over a period. After discussing the situation with their advisor, they select a 10-year term certain annuity settlement option on their segregated fund contract. Now, Richard and Joan have the comfort of knowing their estate will pass gradually to their son over a 10-year period after their deaths. Estate Benefits The annuity settlement option offers many estate benefits: allows clients to control the way their assets are allocated to beneficiaries eliminates the need and cost associated with setting up and managing a formal trust provides an increased level of privacy while avoiding costly probate and estate fees makes sure that younger beneficiaries, such as children or grandchildren, receive a controlled income stream rather than a large lump-sum amount gives parents with disabled children a comprehensive estate-planning tool allows clients to make changes to beneficiaries and settlement options quickly and without fees. Minors and mentally infirm individuals The annuity settlement option may also be effective for minor children or for beneficiaries with an impairment in mental functions. However, instead of naming these people directly as a beneficiary, a trustee (such as a family member) should be named “in trust for” these individuals. Happy planning, safe travels, until next time!