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Advisor SunLife

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The power of guarantees in legacy planning

Baby boomers will inherit billions from their parents in the coming decade. But how can they ensure there will be some left over to pass on to their own children and grandchildren?


Date:July 19, 2016

$750-billion dollars. That’s one Canadian bank’s estimate of how much will be inherited by members of the baby boom generation over the next decade. But what guarantees do individuals have that their nest eggs will still be around when the time comes to pass them on?

Throughout their investing life, most people are focused on growing their assets and balancing risks versus rewards. But as time goes on and retirement needs are looked after, they often begin to think about what they will ultimately do with the rest of their assets and passing those funds on to younger generations. This is where legacy planning comes in, says Cheryl Norton, director of advanced planning, wealth distribution at Sun Life Financial.

“Legacy planning is very important,” says Ms. Norton. “Where do you want your assets to go? You’ve worked hard your whole life to ensure you have a legacy to leave behind, so it should not be taken lightly.”

Ms. Norton says she sees many individuals setting aside money specifically as a legacy because they are likely not going to spend that money during their lifetime. When it comes to planning those legacies, two interrelated issues arise: tax planning and the choice of investment products.

“Often individuals do not consider the tax laws in Canada and are unaware that they may be leaving behind a very large tax bill,” says Ms. Norton. She notes that if an individual has no surviving spouse to roll their assets to, Canadian tax legislation considers the assets to be a “deemed disposition” at fair market value at the time of death. The estate pays the terminal tax bill which could result in less money going to beneficiaries. This could result in a significant tax liability – but planning can be done ahead of time to ensure the tax bill is minimized.

One option is to sell assets or investments in a year when income is lower, therefore triggering gains in a lower tax bracket. Other tax-reducing strategies include gifting assets to children and making charitable donations.

Choice of investment products can be just as important as minimizing tax, says Ms. Norton. Specifically, when legacy planning, investment vehicles that protect principal and allow the investor to lock in returns can be used to make sure funds will be there to pass on. “When you set aside funds for a specific purpose, why not protect that capital?” she says.

When it comes to choosing investment vehicles with built-in guarantees, there are three main options. First, there are segregated fund products. Seg fund products guarantee the return of all or part of the capital invested on death, and they allow the investor to participate in market growth. Depending on the product, the holder may be given the option to “lock in” any positive market returns through re-sets of the death benefit guarantee. Segregated fund products are an insurance product with benefits that depend on the design of the product. Some carry a 100 per cent death benefit guarantee regardless of how long the investor lives, but deposits made after a certain age (e.g. 80) may not be guaranteed for the full amount. Segregated fund products do have their disadvantages, however. There may be penalties for early withdrawal and higher fees.

A second form of protected investment is guaranteed investment certificates (GICs) which offer an annual return at a preset interest rate. Because the interest rate is guaranteed, investors avoid market risk. However, in return for guaranteeing the investment, the provider of the GIC offers only a modest rate of return. And with central banks around the world cutting their interest rates to historic lows, GIC rates are lower than ever.

The third option is gift annuities. Investors can provide for a loved one or charity while watching heirs benefit from their estate. With a gift annuity, investors can gradually transfer their estate at intervals, such as birthdays or other special occasions. They can control how much income children receive and how long they’ll receive it.

Regardless of which investment vehicles are chosen, Lorne Zeiler agrees that protection and guarantees play a role in legacy planning. Mr. Zeiler is a portfolio manager and wealth advisor with TriDelta Financial in Toronto.

“For some clients who fear market drops like in 2008, guaranteeing their assets can become a solution,” he says. Mr. Zeiler likes segregated fund contracts primarily for their tax savings, and also suggests placing a portion of an investor’s holdings in GICs in an amount sufficient to cover one to four years of liquidity needs.

“This way, the client knows that short- to mid-term spending needs are taken care of and the remainder of their investments can have a longer-term focus,” he says.

Though it’s only one part of a comprehensive retirement plan, products that offer guarantees can be attractive to clients when it comes to the legacy portion of their investments because it ensures they will have enough set aside to pass on money to their children and grandchildren, says Ms. Norton.

“People love having that security and peace of mind.”

Advisor SunLife


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