Estate Planning With Segregated Funds

An estate planning feature available through segregated funds from a life insurance company, provides the owner / annuitant with the option to name his / her spouse as a successor annuitant, thereby giving the owner the ability to designate an irrevocable beneficiary to receive the proceeds after the owner's and their surviving spouses death.

Upon the death of the owner / annuitant, the successor annuitant (the surviving spouse) will begin to receive the income stream and assume the rights of ownership.

However, if an irrevocable beneficiary has been designated, the successor annuitant does not have the authority to change the income stream structure (increase the payments) or make any changes to the contract (change the beneficiary); nor can they cash in the plan without the irrevocable beneficiary's written consent.

An In-depth Look at the Issue

Prior to this feature, if the spouse was named as the primary beneficiary when the original owner passed away, the spouse not only became the new owner, but any existing beneficiary designations were revoked and the new owner could make any changes that they wished.

Effective December 31, 2003, where a successor annuitant has been named, the beneficiary is not revoked when they assume ownership.

The beneficiary designations made by the former owner remain effective, including any irrevocable beneficiary designations and the ownership restrictions that go with it.

Keep in mind that this estate planning solution is not right for everyone. In fact, this feature has proven to be extremely beneficial for some, however it does not apply to most situations. In addition, this enhanced feature is only applicable to RRIF, LRIF, and PRIF policies.

Upon death of the original owner / annuitant and the successor annuitant, the death benefit proceeds will paid to the named beneficiary (ies).

As with any RRIF, on the death of the surviving spouse, a tax liability will be created in their estate. If it is not the intention to have the estate of the surviving spouse pay these taxes, alternatives for addressing the tax liability should be discussed at the time the surviving spouse is named as successor annuitant on the RRIF.

Ideal Candidates

Manulife Investments has identified ideal scenarios whereby taking advantage of this feature can bring value to your client's estate planning strategy:

• The owner has children from a previous marriage. The owner wished for the income stream to go their surviving spouse (second husband or wife), and upon the death of the surviving spouse, the remaining assets to be paid to the children from his / her first wife.
   
• The owner's successor annuitant may become, or is already incompetent due to mental or physical illness and would be unable to name a beneficiary when he / she assumes ownership of the contract.
   
• The owner has a concern that their spouse may cash in the entire policy and, as a result, may fall short in meeting future living expenses.

By naming an irrevocable beneficiary, the client can establish a safeguard since the irrevocable beneficiaries would have to sign to authorize withdrawals, increases in payment or contract amendments.

Tips (RRIF Only)

• Successor Annuitant can only be a spouse of common-law spouse.
   
• If the individual named as the successor annuitant does not qualify as a spouse or common law spouse under the Income Tax Act, the proceeds would be paid to the named beneficiaries.
   
• Upon death of original owner/annuitant, the contract will automatically be reset and topped up.
   
• A new 10-year term contract deposit guarantee is started and contract rules are now based on the new owner's date of birth.
   
• Irrevocable beneficiary designation is usually the original owner / annuitant's children.
   
• Irrevocable beneficiaries who are minors (below age 18) cannot provide consent, nor can a parent guardian or tutor acting on the minor's behalf.
   
• The application and Contract Amendment Successor Annuitant form must be dated and signed the same day.
   
• The successor annuitant cannot be named as the irrevocable beneficiary.

Take Action

When considering tax liability, consider the following:

One way to fund the tax liability of the successor annuitant's estate is to purchase insurance on his / her life with their estate named as the beneficiary. In order to ensure the life insurance policy is kept in force, the owner / annuitant could buy an annuity on the surviving spouse's life and have the payments irrevocably directed to pay the premiums.

Another alternative is having the owner / annuitant request withholding tax as part of the beneficiary designation or in the special requests section so that withholding tax is applied before the death proceeds are paid. The amount of withholding tax would depend on each client's situation.