For clients, retirement may be a time for relaxation, travel and other hobbies, but it’s also a good time to review their estate plan.

Generally speaking, people want to feel confident that the hard-earned savings they leave to their family or beneficiaries will be used wisely after they die. “Retirees sometimes want to keep certain beneficiaries from directly accessing their inheritance, either because they lack the knowledge to manage the money or because they have bad habits that could compromise the sustainability of the amounts received or allow creditors access to the inheritance,” says Stuart Dollar, Director, Tax and Insurance Planning at Sun Life Financial.

There are 2 lesser-known possibilities for managing a financial inheritance that allow clients to exercise some control over how their beneficiaries use the inheritance they receive. Stuart Dollar shares his take on these 2 options: testamentary trusts and segregated fund products with an annuity settlement option.


The first option, a testamentary trust, is often created under a will and goes into effect at death. In many cases, the trust gives the beneficiaries a right to the interest and other income generated by the investment, and may also give limited rights to a portion of the capital. “This approach protects beneficiaries from themselves,” says Dollar. A trusted third party (or parties) serves as trustee to hold and administer the trust assets according to the terms of the trust, and for the benefit of the trust beneficiary or beneficiaries.

But, there are some limitations associated with a testamentary trust:

  • The need for a trustee. “In some families, when it comes to naming a reliable trustee, the choice is limited. You can always designate a professional, but obviously that means there will be fees to pay, assuming the professional trustee is willing to accept the assignment,” Dollar points out.
  • The cost of setting up the trust. “A will costs between $350 and $400, for example, and establishing a trust can often drive up the fee to over $1,000,” he says.
  • The structure can be cumbersome to administer. “Opening and managing a bank account, filing an annual income tax return, dealing with the paperwork, and complying with the fiduciary duties that come with the role of trustee — all these obligations make trusts a less appropriate option when smaller amounts are involved,” he sums up. A trust is considered a taxpayer, meaning a tax return must be filed separately from that of the designated beneficiary, so careful thought is needed.

Keep in mind, as of January 2016, income from new and existing testamentary trusts is taxed at the top tax bracket, with two exceptions:

  1. A graduated rate estate (GRE) benefits from graduated tax rates during the first 36 months after the deceased individual’s death.
  2. A qualified disability trust (QDT), whose beneficiaries qualify for the federal disability tax credit, benefits from graduated rates as long as the trust qualifies as a QDT.


The second option for managing a financial inheritance is a segregated fund product with an annuity settlement option. Segregated fund products offer a guarantee that a specified percentage of the initial investment will be paid upon death — independent of market fluctuations. They can also provide some protection against creditors’ claims, as long as the correct beneficiary is named according to provincial insurance statutes. Further, as Dollar points out, “Provincial insurance law lets clients name a beneficiary who will directly receive the segregated fund contract proceeds at death. This facilitates a more tax-efficient transfer of the asset because those proceeds are not part of the estate, and will not be subject to probate fees.”

With the annuity settlement option, what happens next is fairly simple. “When you choose an annuity settlement option,* money from the segregated fund product flows to the beneficiary at the time of death. But instead of being paid out in a single lump sum, it’s paid in the form of a prescribed annuity which benefits from favourable tax treatment.” Annuity payments are considered a mix of interest and return of capital. “But with an annuity subject to prescribed tax treatment, payments of the income portion are equal and spread over time, which generally allows you to defer tax,” sums up Dollar.

Clients can choose a life annuity or a term certain annuity with a 5-, 10-, or 15-year fixed term, for example. It’s another way to manage how a financial inheritance will be used. “Heirs benefit from a monthly annuity to cover their basic living expenses,” concludes Dollar. All without the red tape that comes with a trust.

If you have questions about estate planning or want to learn more, contact your Sun Life Wealth Sales Team.

* Available from some companies offering segregated fund products.

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